randall s kroszner : the effect of removing geographic restrictions on banking in the united states - lessons for europe remarks by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the conference on the future of financial regulation, london school of economics, london, 6 april 2006. references, figures and slides to the speech can be found on the us federal reserve system ’ s website. * * * i am delighted that my first speeches as a member of the board of governors of the federal reserve system are in international settings. earlier this week i spoke at the european central bank, and i am honored today to be able to address this group at the london school of economics ( lse ). the global collection of top academics, key policymakers, and leading private - market participants in these audiences represents what i believe is vital in today's world : a strong spirit of international cooperation and understanding. i am also pleased about the forward - looking nature of the conference on " the future of financial regulation " and would like to express special thanks to two of our hosts at the lse who have had much first - hand experience at policymaking, sir howard davies, formerly of the u. k.'s financial services authority, and professor charles goodhart, formerly a member of the bank of england's monetary policy committee. lse certainly seems to have all of the bases covered! i will focus my remarks on the u. s. experience with removing restrictions on the geographic expansion of banking organizations because i believe that this experience is timely and important for current debates in the european union ( eu ). over the past year or so, the winds of nationalistic protectionism seem to have strengthened in europe, especially with regard to cross - border mergers. the desire to impede cross - border integration has been expressed in quite a few eu countries and with respect to a number of different industries, including banking. just a month ago, in commenting on this position in a speech at the lse on " the development of the european capital market, " eu commissioner mccreevy said, " protectionism denies everyone in europe the economic benefits of market integration - - higher growth, and more jobs. " and later in that speech, he said, " we have to get rid of the unfavorable and even disabling environment for conducting cross - border transactions. some supervisors and governments play fair, regrettably others do not. "

answering that question is to look at the fundamental forces shaping economic activity. in that regard, a first consideration is that financial conditions should prove conducive to stronger economic growth over the next year or so. monetary policy is very accommodative. the nominal federal funds rate is currently 1 - 1 / 4 percent, a level that, using standard measures of core consumer price inflation, implies a real funds rate that is at or below zero, as compared with the real rate's long - run average of about 2 - 3 / 4 percent. with corporate risk spreads having narrowed considerably, borrowing terms are now quite favorable. business financing needs have been very limited recently, and demand for credit has been weak. but the financial sector is well capitalized and under little stress, and lenders should be well positioned to fund a pickup in business demand for credit. in addition, as i noted earlier, equity prices have moved up again. fiscal policy, like monetary policy, has been providing fundamental stimulus to economic growth over the past two years, through both tax cuts and higher outlays for defense. the tax proposals currently under consideration by the congress could add to that stimulus, either by accelerating some of the tax cuts enacted previously or by excluding some portion of dividends from taxable income. a third factor underpinning longer - run prospects for growth is the sustained strong uptrend in labor productivity. labor productivity rose 2 percent in 2001, a remarkable showing for a recession year, and it was up an additional 4 percent in 2002. productivity appears to have a strong underlying trend, which could support overall income growth even if the weakness in the labor market continues for a while longer. in assessing how these factors will play out over time, i find it useful to consider separately how they translate into a pickup in demand among households and among businesses. from the perspective of households, the combination of lower energy prices and tax cuts should help bolster real disposable income in the near term. in addition, the drag on household spending from the earlier declines in stock market wealth should gradually diminish, especially if the stock market holds on to its recent gains. low interest rates should allow consumers to continue to finance their purchases relatively cheaply, whether through home equity loans or through more standard instruments. the outlook for the business sector is perhaps a more critical consideration. here, too, the fundamentals look favorable. in the near term, lower oil prices should reduce the costs of production for