In the 19^th century, if you wanted to transport some tobacco from Hartford to Albany, you would send it by railroad. Similarly, if your job called for long-distance travel, the train again would be your first choice. But as transportation patterns evolved and new options caught customers’ eyes, the railroad's once pre-eminent position declined. Competition — not from within the industry but in the form of trucks, airplanes, barges, and even oil pipelines — soon displaced the trains.

While a complex overlay of environmental changes contributed to the 180 degree turn in the railroad industry, the regulatory and competitive aspects took increasing precedence. After World War I, regulations, which had once helped the industry and protected the public, failed to evolve with the competitive climate. At the same time, less regulated and more convenient modes of transportation began to appear. Presented with attractive alternatives, passengers and shippers began to take their business away from the trains. Yet railroad owners remained blind to competition beyond their own tracks — on the highways, in the air, on the water. Eventually, they lost most of their customers, never to regain their former prosperity.

You and I live in a financial world, which is not dissimilar to the railroad industry. Both are service businesses, dependent upon retail as well as commercial business, and subject to intense competition and regulation. If we accept our lot as it is — one of financial surrogates eroding our market and regulations holding us back — we might well follow the route of the railroads.

MY TWO POSITIONS UP FRONT:

First, I believe that commercial banking must change substantially to withstand new competitors. To many people, these new competitors mean banks crossing over state borders or in other words, the concept of nationwide banking. I am here to talk about a different type of nationwide banking: the one which comes from other financial institutions and non-banks carving out a piece of our bailiwick — money and instruments of credit — an area predominantly ours. While we must operate in a restricted environment, held back by antiquated regulations, these near-banks are invading our market. To recapture or even to maintain our present market share, we must seek new solutions.

Second, Citicorp perceives a significant business opportunity in helping independent correspondent banks stave off the forces of non-traditional competition. We want to make you more profitable through traditional as well as innovative services. By encouraging your growth, we strengthen the commercial bank industry and we make money for ourselves.

I. BANK REGULATIONS

Banks are bound today by a web of economic regulations. Since the 19^th century when government first began zeroing in on bank regulations, massive amounts of legislation have been imposed upon our industry. Though every regulation has a special history and justification, each shares a fundamental goal: to serve the common good. Yet upon examination of old banking laws, we discover that most have passed from empowerment and best serving the populace to restrictions.

Regardless of intended purpose or historical connection, the present laws and regulations concerning financial transactions are anti-competitive and thus opposed to the spirit of free trade and commerce. They impose artificial barriers, hampering the free flow of ideas, people, and resources. This opposition, in turn, is antithetical to the principle of free enterprise — a principle, which has always been the great equalizer in America as well as a proven force behind prosperity.

The result of old restrictions is that our commercial banking system is regulated more closely and in greater detail than any other U.S. industry — industries which perform bank-like functions and are free from regulatory barriers. In contrast to us, many of our competitors can, for instance, expand nationwide and lend without restrictions. The net effect of these regulations is indeed harmful to your interests, our interests, as well as to those of our customers. I therefore believe that regulations, while historically justified, must change as the banking arena changes.

Free enterprise is the basis of our economy — we all gain from free competition, we suffer from its absence. While state and Federal regulators have been enforcing obsolete laws, arguing about who should be allowed to write checks, pay interest on deposits — and how much interest — and whether a computer terminal is a bank — your customers in Connecticut and our customers in New York have been taking their business elsewhere — just as shippers and passengers took their business away from the railroad.

At the end of World War II, banks claimed 57% of the assets owned by the financial services industry. Today, the percentage has dwindled to 34%, more than a 40% loss in asset share. The financial services business is no different than any other — either you provide what your customers need or they seek another supplier.

The list of non-banking companies granting credit as well as accepting money for deposit on a nationwide basis becomes longer every year. As it expands, our list of customers becomes shorter. Look at some of our major competitors: Sears, Merrill Lynch, Beneficial Finance, General Electric Credit — all are free to operate nationwide, unrestricted by the McFadden Act. If these institutions can perform bank-like functions and can offer our customers better service than we can, they have a right to our customers. On the other hand, we should all be allowed to compete equally — that is, we should all have the right to operate on the same piece of ground, with the same types of restrictions.

Interstate barriers, if not already anachronistic, are falling. While communications technology only begins to render them obsolete, it is non-bank competition, which captures the lead. I consequently believe that to survive, banks also must and will find ways to serve their customers from coast to coast. This fact carries enormous implications for how the correspondent banking business will be defined in the future.

Let’s examine a few of our competitors. Consider Sears, the retail store, which billed itself as the "Greatest Supply House on Earth" in the 1930’s. Today they are a great supplier not only of tools and Kenmore sewing machines, but also of a shopping cart of financial services — services which net them about one-half of their earnings.

Though their primary business ostensibly lies outside of the financial realm, we as bankers must confront the fact that they are taking our customers. Their enormous issuance of credit cards and $1000 intermediate term notes is just the icing. Underneath they have, for example, a savings and loan company, a mutual fund, a finance company and even more important in terms of profit, the Allstate Insurance Company. With annual financial earnings surpassing every single one of America's 14,000 odd commercial banks, they are invading our marketplace.

Banks are also confronted with the fact that many companies are now bypassing the traditional financial market altogether. The tendency for non-financial companies to write IOUs to one another in the form of commercial paper has escalated dramatically in the past fifteen years. Since 1965, when short term lending by one corporation to another was less than $1 billion, the business has expanded more than twelve-fold. Along each step of the way, banks are cut out of the process. Adding commercial paper held by such entities as insurance companies, money-market funds, and foreign investors to the picture, the total rises to over $16 billion.

The proliferation does not stop though, with business. Consider the explosive use of those little plastic cards, only 15% which are bank issued. One need no longer go to a bank for a loan or for American Express travelers checks — with the flash of a card, installment merchandise, money, and travelers checks can appear almost instantaneously.

The trend is clear: credit markets in the United States are moving steadily away from the nation’s traditional depository institutions. Competition clearly exists in the financial marketplace but its extent and intensity are inversely proportional to the amount of government intervention; that is to say, those parts of the marketplace where the government’s hand appears most often are precisely the areas in which we find the least room for competition. Thus, while retail institutions, blue-chip corporations, and credit card issuers profit from free and unfettered competition, we lose ground.

Meanwhile, bankers continue an uphill battle with each other, almost oblivious to our diminishing market share. To me, this points to a conceptual void. Bankers fighting bankers is like rearranging deck chairs on the Titanic!

III. COMPETITION IN CONNECTICUT

The market share of Connecticut banks follows national averages; it is dwindling. From ’68 to ’78, while your commercial banks grew from $5.4 to $11.3 billion in assets, the compound rate of decline was one and a half percent. Further, you have moved to second-to-last place in the field of earnings. A major reason for these dismal facts is non-commercial bank competition.

The asset size of mutual savings banks, for example, has shot up dramatically over the past decade, now exceeding commercial banks by several billion. Savings and loans, though markedly smaller than either commercial or mutual banks, have also grown more swiftly than you.

The growth of thrifts, however, pales in comparison to credit unions. These tax-exempt organizations here in Connecticut have spiraled from a mere $200 million in 1970 to over $1 billion last year. With share drafts, several ATMs and even a VISA offering, credit unions are looking increasingly like commercial banks — and to some, even better.

Aside from these financial institutions, your competition stems from a variety of sources: captive finance companies such as Beneficial, CIT Corp., and GMAC; insurance companies like Aetna’s Business Credit subsidiary; brokerage houses such as Merrill Lynch, a company which has made sharp inroads in many states; even retailers like Sears and JC Penney who do not yet have an overwhelming presence in Connecticut, but whose entry is imminent.

IV. YOUR CUSTOMER’S VANTAGE POINT

Let’s move away though, from your situation, to that of the customer.

Our average customer is suddenly becoming credit-wise in this era of belt tightening. Although most consumers fail to understand the distinctions between different types of financial institutions, they don’t care. What they want is a full line of financial products and services made available at the lowest cost and greatest convenience. While personalized service still makes some difference, our consumers gravitate toward the most lucrative investments.

If you can’t get what you need from your bank, you go somewhere else. I, for example, like the yields from one brokerage house’s ready money market account. Our customers, likewise, are shopping around. They have discovered Treasury bills, short-term government securities, and the like. They have also been obtaining loans from industrial or retail-based companies. All totaled, this process of disintermediation is eating away at our market.

From the corporate point of view, banks are often labeled as lenders of last resort; commercial paper has become far more attractive. One reason is the gap between interest rates charged by us and the lower rates charged by industry through dealers who act as market intermediates. Another is the technological revolution; cash management has been fueled by the computer. Now corporations know how much they have at a precise moment and can transfer money at the push of a button.

To our customer, credit seems to be most readily available and convenient in the sector of the marketplace that suffers the least regulation. We must therefore work together to be allowed to compete on even footing.

V. YOU AND CITICORP

If banking is indeed changing and if, as many believe, nationwide banking is to be the norm, then most bankers would prefer an orderly, rational transition against which they can do long-range planning.

This is where Citicorp is making efforts to impact the future growth of commercial banks.

We believe that changing the direction of a bank is like trying to turn an aircraft carrier. It takes fine-tuned planning and a rigorous survey of the environment before the captain can even begin to turn the carrier. Once the decision is made, it takes a mile before the turn is even noticed. If the carrier's direction is off-course, getting back on the correct route takes many more miles. Similarly, we must strategically plan for growth within our industry. To boost our diminishing returns, we cannot afford to miss the mark.

For you to be successful, you must assess what route your bank, your competitors, and the government regulators will take in the future — not just next month or next year, but in five or ten years.

Sometimes you run into a sandbar as we did with our Person-to-Person Finance Center in Westport; but if you don't try your hand at what your competitors are doing, you will continue to lose market share.

If our industry as a whole positions itself in the right direction, it will be able to ride the current of change, ready to take advantage of those ripe opportunities. But as opportunities arrive, banks must be free to move as quickly as their competitors. When you trace the history of how leadership positions were established from Xerox in copy machines to Hertz in rent-a-cars, the common thread is seizing the initiative before the competitor has a chance to get a strong foothold.

This is where Citicorp enters into the equation. We want to help you grow with new solutions. And by making you grow, we will grow.

As I survey the correspondent marketplace, I see few, if any, correspondents who provide respondents with more than the basic services: loan participations, overlines, check clearing and so on. Yet I believe there is tremendous potential, and tremendous profit, in a different type of correspondent relationship — a reciprocal, innovative relationship where both parties profit.

If the inevitability of nationwide banking is a given and if banking today is a business that demands new levels of management, financing, and technological expertise — management skills which can keep earnings up, financing sources to generate reasonably priced funds, and technological expertise to increase productivity and attract new customers — then it follows that correspondent banking is a business that must meet these demands. Based on this premise, Citicorp has entered into the independent correspondent bank business — a business, which pivots on strong relationships.

My mission at Citicorp is to make these strong relationships happen. Through Correspondent Resources, Inc., a Citicorp subsidiary serving independent correspondent banks, we are seeking to share Citibank resources with you — resources which deal with management, financing, and technological concerns — resources which can make you more attractive to customers.

Our goal is to help you meet the challenges of a new decade. If this means equipping you with the tools to meet non-bank competition, we are ready. If this means helping you to fight fairly against other financial institutions, we are again ready. In short, our business is to help you become more profitable.

I manage our account representatives, now known as relationship managers. They are regionally based to better understand your community and to call upon you more frequently. Fluent in all of our traditional as well as innovative services, they can analyze your needs and show you how our ideas can fit into your organization. Our ideas come to you with the R&D complete, with the wrinkles smoothed out. What you receive is a new generation of services.

You might wonder why we have entered into this business. Profit is a motive — profit for both of us. But equally important, we believe that one of the greatest strengths of American banking is the correspondent network — a partnership, which continues to be reciprocal, where both parties benefit. A well-managed bank can survive the onslaught of a volatile environment. But if independent banks are inundated by competition, unable to stay afloat, we all lose.

This is not a David and Goliath struggle. We are all commercial bankers vying for consumer dollars as well as against the forces of competition. By making you more profitable, we also gain. Hence, from a business standpoint, we have a strong interest in working with you.

CLOSING

I want to close with a little saga about regulations and the demise of a large segment of an economy.

In 12^th century Western Europe, the entire medieval economy was based on guilds. Guilds are trade associations of persons engaged in the same business or craft, created to establish local control by setting standards of workmanship and price as well as by protecting the business from competition. They could be, for example, organizations for making tallow, leather, glass, jewelry, food stuffs — in effect, everything that one could possibly use in trade. These guilds became increasingly regulated — even to the point of having laws forbidding closed windows during working hours so that passersby could check to see that no fraud was occurring.

After several centuries of the insular, often monopolistic guild-based society, the economy began to open up: communications improved, trade expanded, and demand for goods increased. Rich merchants, in response to the changing needs of society, began to dabble in world trade, bringing in cheap goods from Scandinavia, Greece, and the Middle East. As these unregulated, imported items made their way to the markets, they were snapped up quickly over the expensive guild-produced products — products which sported a high price tag because of rigorous controls and over-regulation.

As time went on, the guild system became increasingly rigid, unable to adapt to the new demands of an age of exploration. While the economy expanded, guilds stagnated, jealously attempting to guard their monopolies and ignore change. Thus, by the 17^th century, the rusty edifices came down. Guilds, unable to compete, collapsed.

Unless banks are allowed to freely compete, they might follow the unwelcome path of the medieval guilds as well as the U.S. railroad system.