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Regulatory and legal issues brewing in the banking industry.

Tennessee bankers will face many challenges in the coming year as the economic and regulatory environment remain uncertain. Potential changes in regulatory and legal restrictions and the possibility of a national recession in addition to existing weakness in real estate will affect financial institutions in the state.

Economists have been forecasting a recession or a "soft landing" for the national economy for some time, with the Federal Reserve maintaining a tight money stance to ward off inflation. The economy may have begun to show signs of a possible recession with recent slowing in manufacturing. Tennessee has had mixed results in recent years with certain sectors of the economy, such as real estate, showing extreme weakness. On the other hand, sectors such as trade and transportation have fared well.

Statewide total employment growth peaked in the last half of 1988 and has since dropped significantly reflecting, the general slowdown of activity statewide. Hardest hit have been Nashville and Knoxville, with total employment actually contracting in those metropolitan areas. Memphis, Chattanooga, and the Tri-Cities area will not be immune to an economic downturn but have so far maintained positive, albeit slow, growth. Banks are directly affected by the economy of the markets in which they operate. The credit quality problems experienced at the large Tennessee banks this year are reflections of economic weaknesses in Tennessee as well as other areas of the country.

On the regulatory and legal fronts, the biggest newsmakers may be the passage of national interstate banking in Tennessee, the repeal of the GlassSteagall Act, and the continued impact of the S&L crisis.

Since 1986, Tennessee law has allowed the acquisition of banks in Tennessee by out-of-state banks within the southeastern region. The Tennessee Bankers Association (TBA) recently agreed to support an amendment to that legislation that would allow banks anywhere in the country to acquire banks in the state. The bill is not a new topic, as it has been presented to the legislature in past years and has even been nicknamed the "Citibank Bill" after one of its more active lobbyists. However, what is causing renewed speculation in banking circles is the support of the bill by the Government Relations Committee of the TBA. We expect the bill to be passed sometime in the first half of 1990 and become effective immediately. Passage of a national interstate banking law in Tennessee would greatly increase the number of potential acquirors of the few remaining large, independent Tennessee banks.

The repeal of Glass-Steagall may be closer than ever before as its main guardian, the securities industry, has reversed course and is now working toward repeal. The Glass-Steagall Act restricts banks' powers by prohibiting banks from engaging in investment banking activities. Since deregulation began, the banking industry has sought those powers without success. Although the securities industry has tried to protect its business from the encroachment of banks, federal and state regulators have neutralized portions of Glass-Steagall by granting new powers to underwrite certain securities. The full repeal of Glass-Steagall would provide banks with new sources of revenue. The securities industry in turn wants to obtain some, if not all, banking powers including the ability to borrow at the Federal Reserve discount window in emergencies.

The passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) has already brought change to the financial services industry and will continue to create changes in the coming year. The passage of the law does not cure all the ills of the domestic financial industry, but it does take a step toward evening out the playing field in financial services. Complete consolidation of the bank and thrift industries may not occur immediately, but with the ability of banks to acquire healthy thrifts now law, consolidation of the two industries is facilitated.

In addition, FIRREA has resulted in the resolution of some failed thrifts which could also result in consolidation.' The savings and loans in Tennessee are generally much stronger than the S&L's in the southwest. The few ailing S&L's in Tennessee are in the resolution process and will either be absorbed into other savings and loans or a bank will be liquidated.

The dynamic nature of the financial services industry will continue, and Tennessee banks must be prepared to meet these challenges. Ms. Roy is vice president of Morgan Keegan $ Company, Inc., in Memphis.
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Title Annotation:Tennessee banks
Author:Roy, Elizabeth
Publication:Business Perspectives
Date:Dec 22, 1989
Previous Article:A rougher landing for the Tennessee Valley economy in 1990.
Next Article:Cheap energy and the economic boom.

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