45th Annual Conference on Bank Structure and Competition
The Federal Reserve Bank of Chicago hosted its 45th Annual Conference on Bank Structure and Competition at the Hotel InterContinental in Chicago. The conference has a rich tradition as a leading forum for dialogue on public policy issues affecting the financial services industry.
The conference theme this year dealt with financial regulatory reform. Federal Reserve Chairman Ben Bernanke, via satellite, provided the opening keynote address. Sheila Bair, Chairman of the Federal Deposit Insurance Corporation and John Allison, Chairman of the Board at BB&T Corporation presented their perspectives at the luncheons on Thursday and Friday, respectively. We also had a panel of industry experts discuss the conference theme, and additional sessions where topics ranging from the current financial crisis, the performance of U.S. mortgage markets, personal bankruptcy trends, the future role (if any) of market discipline in financial markets and other policy relevant issues will be debated.
The conference theme was particularly timely. At the 2008 Bank Structure Conference, a number of speakers emphasized the need for reform of regulation and oversight of the financial services industry. Subsequently, the U.S. Treasury proposed a blueprint for reform, both presidential candidates stressed the need for reform during their campaigns and the calls for regulatory reform intensified, with problems in financial markets cited as a major cause for the deterioration of the economy. Leaders in both houses of Congress have indicated that regulatory reform will be a high priority item.
Proposals for reform have been quite varied ranging from a significant move back toward the policies implemented during the 1930s (based on the argument that the current crisis is mainly a result of the unwinding of those policies) to calls for minor tweaks of the current framework (based on the position that the crisis was driven by a relatively few, fixable, regulatory problems, such as the lack of transparency and distorted incentives.) There were an array of issues that needed to be seriously considered during the policy debate.
- How can we efficiently address the tradeoff between too-big-to-fail policies and moral hazard?
- Can too-big-to-fail be effectively managed with new failure resolution processes?
- Should banks be run as public utilities?
- Do we need a regulator whose major (sole?) responsibility is managing systemic risk in financial markets?
- Should that regulator's responsibilities expand beyond financial markets?
- Do we need a thorough revamping of the complex, multilayered structure of financial regulation in the U.S.?
- Do we need a new product approval process in finance similar to that for the pharmaceutical industry to avoid the introduction of potentially destructive new products?
- What is the appropriate role of the financial government sponsored enterprises (GSEs) in the future?
- What is the responsibility of the rating agencies?
- Is there a concern that the push for reform may be an overreaction and result in a significantly less efficient process of credit allocation (a position argued by those who show evidence that the most inefficient regulation is put in place during times of crises).
Each year, we bring together industry leaders, scholars and regulatory authorities to address current economic issues. The first day of the conference was more technical in nature and typically attended by an "academic" audience.
Charles L. Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago
Market Discipline and Signals in Banking?
A Brief History of the Conference
Since the early 1960s, the Federal Reserve Bank of Chicago's conference on bank structure and competition has served as a forum for academics, regulators and industry participants to debate current issues affecting the financial services industry. Each year, the purpose of the conference is to continue that tradition. This retrospective on the history and evolution of the conference reviews the past four decades of conferences.
The primary motivating factor for the conference was the passage of the 1960 Bank Merger Act and the U.S. versus Philadelphia National Bank supreme court decision. Suddenly, bank regulatory agencies were required to consider competitive factors in addition to banking factors when evaluating bank merger applications. Each of the Federal Reserve Banks was encouraged to survey the existing literature on bank structure and develop its own research agendas on these issues.
In January 1963, the Chicago Fed held a meeting with local academics to discuss current research in the microeconomics of financial markets and to encourage future research efforts. About 20 academics met and, following a thorough analysis of the issues, agreed that a follow-up meeting was merited. Those follow-up meetings continue to this day.
In the early years of the conference, the primary focus was on evaluating bank performance. How did one measure competition? What was the relevant banking market? What was the relationship between market structure and bank performance? What were the effects of bank mergers? While the issues facing the banking industry have obviously changed through the years, it is amazing how many of these traditional, fundamental issues have continued to resurface as conference themes.
During the early 1970s, the emphasis of the conference was on the need for industry deregulation and potential risks imposed by existing regulatory arrangements. The costs and benefits of restrictions such as Regulation Q, service limitations and bank product and geographic limitations generated intense annual debates. These debates preceded by many years the actual relaxation of the regulatory restrictions.
The late 1970s witnessed problems within the industry that led the conference away from its emphasis on deregulation and improved industry efficiency toward a broader array of issues including risk management, measurement of bank soundness and the causes and consequences of bank failures. Perhaps most importantly, these years also witnessed a movement toward an analysis of the broader financial services industry instead of banking per se. Once again, the conference debate preceded the actual implementation of public policy by a number of years. For example, during this period conference sessions were organized on topics such as community reinvestment, gender discrimination in lending, pricing of Federal Reserve correspondent banking services and analysis of the reserve requirement burden.
The overriding issues during the 1980s were the industry safety net, distortions resulting from its mispricing and alternative means for both financial institutions and regulators to better manage risk. Sessions on moral hazard issues were numerous. There was significant emphasis on the need to, when possible, replace or supplement regulatory discipline with market discipline. The merits of alternative regulatory structures and optimal means to reprice the safety net were debated. However, the conference continued to feature analyses of the potential benefits of deregulating product powers and geographic expansion. It was also during the 1980s that the conference expanded to its current format, which combines academics, regulators and industry participants. This combination of financial industry researchers and practitioners has made for better, more relevant policy discussions.
In recent years, the conference has emphasized the changing nature of the financial services industry and the increase in nonbank competition. Conference themes have focused on banks' role in the broader financial industry, strategic and financial market innovations, the impact of the Gramm–Leach–Bliley Act, the structure of the financial safety net, the behavior and regulation of banks over the business cycle, the means to address recent corporate governance problems, innovations in real estate markets and the potential impact on bank performance and the advantages and disadvantages of mixing banking and commerce (following the Wal-Mart industrial loan corporation application). The past few years have concentrated on developing problems in mortgage markets and turmoil in credit markets. Those recent problems led to the theme for this year's conference: Financial Regulatory Reform.
The effectiveness of the conference through the years in affecting public policy and academic research was evaluated in The Bank Structure Conference Impact Study, Journal of Financial Services Research, Vol. 34, December 2008, by Douglas Evanoff, Philip Bartholomew, Robert DeYoung, Cosmin Lucaci-Oprea and Ronnie Phillips.