mark w olson : the banking industry in 2002 after a decade of change speech by mr mark w olson, member of the board of governors of the us federal reserve system, before the first annual convention of the ohio bankers league, columbus, ohio, 12 november 2002. * * * many of us began our careers in the financial services industry during an era when bank and thrift executives saw each other as both business competitors and political foes. i distinctly remember one experience i had as a member of the american bankers association's government relations committee in 1979. at our first meeting of the year, the " quarter - point differential " that thrift institutions were allowed under regulation q was the banking industry's top political priority. for those of you too young to remember, regulation q established the maximum allowable interest rate that could be paid on deposit accounts, which at the time was a quarter point higher for thrifts. this first annual meeting of the ohio bankers league following the merger of ohio's banking and thrift trade associations is emblematic of the changes that have taken place in these two industries. and this event presents a good opportunity to review today's depository financial service industries in the context of a decade of major change. to begin, let's review the highlights of the past decade. first, there was the bank and thrift crisis of the late 1980s and early 1990s. many banks and thrifts failed, and many others were weakened to the point that they became acquisition targets. the congress and the regulators responded forcefully with the federal institutions reform, recovery and enforcement act ( firrea ) in 1989, and the federal deposit insurance corporation improvement act ( fdicia ) in 1991. these legislative initiatives restricted banking practices, limited the supervisors'discretion in dealing with weak banks, imposed new regulatory requirements - - including prompt corrective action - - and strengthened supervisory oversight overall. beyond the bank and thrift crisis in this country, there were also indications that banks of other nations followed different norms of capital adequacy, which had implications for competitive equity and for the overall soundness of the global banking system. the g - 10 nations responded with the basel accord, a single, fairly simple global standard that was implemented in the early 1990s. the basel standards have become somewhat less simple over the years and are again under review. but achieving international agreement on both components of capital and a risk - based approach to capital adequacy was a major achievement. a second force

some years ago many believed, along with milton friedman, that stabilizing the growth of the money supply would lead to stable prices. but this approach is now generally discredited because shocks in the demand for money and an unstable transmission mechanism imply that stable growth of monetary aggregates could lead to quite unstable behavior for prices and real incomes. the next step was to follow bennett mccallum ( 1988 ) and avoid inappropriate responses to shocks in the demand for money by having the central bank simply stabilize nominal income growth. but again, if there were shocks in this nominal income growth, say productivity shocks, stabilizing nominal income growth would not necessarily stabilize prices. the same productivity shocks have led to difficulties with the instrument rule proposed by john taylor ( 1993 ), which requires either a predictable rate of growth of potential output or a predictable natural rate of unemployment. as these other procedures for conducting monetary policy have run into difficulty, academic economists have increasingly drifted to the straightforward view of bernanke, laubach, mishkin, posen and many others that, if central banks want to stabilize prices, they should just do that by inflation targeting. but the migration of academic economists to inflation targeting is nothing compared with the migration of actual real world countries to inflation targeting. the earliest and still most elaborate procedures were adopted by new zealand, where the parliamentary government in 1990 began negotiating inflation targets with its newly independent central bank, making these targets public, and holding the bank responsible for hitting the targets. other regimes came later and were less elaborate, but by now a great many countries have regimes in which they publish inflation targets, have the central bank commit to meeting these targets, and comment on the progress in meeting the targets. because all central banks in the world are responsible for controlling inflation, it is reasonable to ask how explicit inflation targeting regimes differ from non - targeting regimes. from a legislative standpoint, the differences seem reasonably clear. inflation targeting regimes have explicit inflation targets, explicit commitments of the central bank to meet these targets, and less formal commitments to achieve other goals, such as output stabilization. but from a practical standpoint, the differences could be much less distinct. on one side, even non - targeting countries often will be strongly committed to controlling inflation. on the other side, countries that target inflation flexibly and in a forward - looking manner may also strive to reduce output variability, perhaps because it helps to stabilize future inflation. as will be discussed below, an empirical analysis by cecchetti and