Author
Since 1985, William Taylor has been staff director of the Division of Banking Supervision and Regulation at the Board of Governors of the Federal Reserve System in Washington, D.C. As such, he oversees the Fed's supervisory responsibilities for over 1,000 state member banks and about 6,500 bank holding companies.
Taylor joined the Board's Division of Banking Supervision in 1976 as an officer and since that time has been a part of a department that has overseen tumultuous changes in the nation's financial service industry—from a period of highly regulated services to the current era of increased banking powers.
A graduate of Cornell College, Taylor began his banking career with the Federal Reserve Bank of Chicago in 1961, where he served as a bank examiner until 1968. From 1968 to 1972, he was vice president in charge of lending for the Upper Avenue Bank in Chicago. He then became vice president and manager of the Chicago office of James W. Rouse and Co., a real estate development and mortgage banking firm, where he worked until rejoining the Federal Reserve System in 1976.
Region: Considering the ongoing integration of financial services at the national and international levels, what are your concerns, as a key bank regulator, about this erosion of banking barriers?
Taylor: The erosion of banking barriers comes in two principal areas: that of bank powers and that of bank geography. In the area of powers, it is clear that many major countries around the world have allowed, or are in the process of allowing, banks into the securities business. Our banks have been prohibited from such activities since the early thirties. It is argued that to stay competitive with the rest of the world's banks, at a time when integrated global banking is becoming more of a reality, our banks should be allowed into the business. It seems like a good bet that this argument will prevail and I would hope that careful consideration is given to the safety and soundness implications of banks taking on these new types of risk. Probably the more dramatic erosion of barriers lies in the relaxation of interstate restrictions on bank holding companies. In 1980 there was only one state that allowed a bank holding company from another state to own a bank within its borders. Today almost all states allow some form of interstate banking. In this case I am worried about banks expanding too fast or without full knowledge about what they are acquiring.
Region: What should be the Federal Reserve's role in this process?
Taylor: The key role for the central bank in all this is to see that in the process of change the stability of the banking system is maintained. As the lender of last resort, it is essential that the Federal Reserve be able to assess the risk of the new powers and the new geography. Maintaining a strong supervision function is essential in this regard.
Region: Would you see that role changing in the future?
Taylor: Although the specific tasks to carry out the role may change based on the type of changes that occur in the financial system, the Federal Reserve focus will continue to be on the elements of the financial system that could cause risk to the system.
Region: The question that I hear asked every once in a while is: Should there be three principal federal banking regulators in the United States? (The Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency currently regulate the financial services industry at the federal level.)
Taylor: I've always answered this question in a very straightforward fashion and the answer is no. There should be one. It should be the Federal Reserve. Many people don't agree with that, but that's my opinion.
Region: So that's the "should" answer. How do you think it "will" play out?
Taylor: Over time we must work to rationalize the system of supervision to the type of financial system that develops. Clearly, as nationwide and global banking become a reality, changes seem in order. Hopefully, those changes will leave the Federal Reserve with responsibility for state banks who choose voluntarily to have us as their supervisor, the large consolidated banking organizations, and the international operations of banking companies.
Region: Turning to the Federal Reserve System, what would you list as the System's most notable supervision and regulation accomplishments in the `80s?
Taylor: In a business where the greatest successes are invisible and the worst failures are held up to the most severe public scrutiny, I would be cautious in noting accomplishments—except to acknowledge our people. They indeed are the System's greatest accomplishment in the area of supervision. They have a great capacity to respond to a variety of crises in a variety of locations and sectors. This is especially true of the field force. We have been able to challenge the people and they have responded magnificently. They sense it as their duty. They are prepared to make sacrifices and most importantly have a tremendous desire and ability to perform. They are the force. I would take them anywhere.
Region: On the flip side, what would you label as "still needs more serious attention"?
Taylor: We can always use more training and more modern equipment. Keeping up with the continual innovations in financial markets is difficult. It is not possible to just learn the business once. Continuing education is an absolute necessity. We have tried to provide our experienced examiners with more formal training but more needs to be done. As to equipment, I feel we need to exploit the personal computer more. It is a great tool and has provided tremendous benefits to banking supervision, but keeping up with the technology requires investment and reinvestment. Some say, are you sure it is cost effective? Certainly Edison had the same question about electricity.
Region: Looking forward, what are some of the potential trouble
spots and challenges for banking regulators? Could there be yet another
S&L-style crisis looming in the `90s?
Taylor: Potential trouble spots and challenges? Yes, it's a business of worrying and today we have to be in that mode when thinking about the real estate situation and the increasing corporate leverage that you see in these LBO deals. Combine these worries with a strong and growing economy with stable prices and low interest rates and one's sense of well-being appreciates. However, add a more negative scenario on these other factors and life gets tougher. Hopefully, another S&L-type crisis is not looming out there, but the fact that we have had such a crisis ought to make all of us in the business of banking supervision pay very close attention to our business.
Region: Considering the thrift debacle, is there one lesson that stands out among the others?
Taylor: The whole thing offers many lessons, most of which have been taught before. Fast growth, unstable funding sources, human frailty and a lack of controls can severely damage an institution—but the big gamble that causes the most fatalities is in the area of asset quality. Making loans (or equity investments) that do not generate sufficient cash flow to service the debt and cover the risks involved is the greatest danger facing financial institutions, including banks.
Region: You've been working with the Resolution Trust Corporation (RTC) for the last few months and had the opportunity to be present at its creation. From your vantage point, how would you say it's going? (The RTC is the government agency created by Congress to manage the sale of insolvent savings and loan institutions and their distressed real estate.)
Taylor: Actually, I worked with the RTC Oversight Board from two days after its initiation and came back here sometime in the middle of November. I'd have to say all things considered, that with respect to both the RTC Oversight Board and the RTC itself, things are going about as well as one could expect. They're cranking up the largest corporation in the world to handle the world's greatest liquidation, so you can't expect it to go without bumps. But I think all the people involved are working as hard as they can to get it on an even keel.
Region: Your pre-Fed background, I understand, is in real estate. Was that useful in your experience with the RTC?
Taylor: Yes, in the sense that I think my background—my limited background, I might add, is in real estate finance—has always been helpful. In real estate finance you get a familiarity with yields, cash flows, the concept of numbers and ideas; so yes, in that sense, it's very useful. But I don't think of myself as a great real estate expert.
Region: In an institution the size of the Fed, it's not at all uncommon that communication could stand improvement. One corner of the empire often is oblivious to what's happening in the opposite corner. When it comes to supervision and regulation, the opposite seems to be the case: the Board and the district banks hold weekly conference calls and quarterly face-to-face meetings. The spirit seems extraordinarily high as those charged with the regulatory duties feel like they're in the picture, that they're working on a well-organized team. To what do you attribute your success in overcoming the typical bureaucratic outlooks?
Taylor: Well, I wish they were all overcome. I mean, we try very hard and we have a very honest endeavor among all of the Reserve Banks and ourselves here at the Board to have open communication, and to make sure that we talk and meet regularly to discuss the issues. But it is a constant battle, at least from our end, to make sure that we talk and listen to each other. To make sure that we do it effectively. Although I think we've made great strides, I think there's still more to be done and we're committed to keep working at it.
Region: Communication seems like a very special interest of yours, and the regulators in our bank have told me that when they compared your function to maybe some of the others within the System, there's a marked difference—and they attribute that to you. Why are you so motivated to do these kinds of things, to be as communicative as you are?
Taylor: Well, actually so that I can offload the work! The question is: How can we exploit people? When I look around at who we have to exploit, I see we have many, many capable people in the System. They've turned in tremendous performances on various subjects. Thereby we can, in effect, off-load specific projects and get them done. And secondly, it also works in the way of advice. It's not just project oriented. The fact that someone in the System will disagree with your position allows you to hear the other side of it from someone that you trust. It`s really quite a positive thing for us here at the Board.
Region: The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have made major realignments of their organizations and salary structures in obvious response to their rapidly changing external environments. Could there be any parallels for the Fed?
Taylor: Yes, I think we ought to make sure the salary of our senior examiners is competitive. That's in the hands of the Reserve Banks and, of course, the Board squashes down their budgets, so it is also our responsibility. Granted, these are public servants and they're not people who are going to get rich or necessarily should get rich, but we're going to cut off our nose to spite our face unless we make sure we pay them competitively.
Region: Thank you, Mr. Taylor.
