In a world full of instant data which can be summoned up on desktop terminals anywhere on earth, it is sometimes useful to try to extract from the mass of data some real information. As bankers, we tend to see the world through our own lenses, as do all other groups in our society, and so we can be subject to the same narrowness of vision that afflicts any other group, public or private. This is not a new phenomenon.

More than two thousand years ago, Plato gave us the analogy of a cave in which the inhabitants of the den can see only the shadows on the wall cast by objects behind their backs and all they can hear is the sound of their own voices. When these cave dwellers finally come out of the cave into the sunlight and see real objects, they are almost blinded. As their eyes adjust to the light, Plato asks whether any of them will be able to accept the world in which he finds himself. "Will he not fancy that the shadows which he formerly saw are truer than the objects which are now shown to him?"

As we bankers begin to emerge from our protected cave of pervasive regulation, a lot of what we encounter in the high noon of a freer marketplace appears to be very different from the shadows we saw on the wall. Image and event, shadow and substance, are now illuminated by the blinding light of competition from all sides. What tests can we employ to separate the shadows from the reality?

In our oldest traditional business of lending money, we all have developed pragmatic benchmarks. We review our credit mistakes when they appear and try to teach ourselves not to repeat them. Each generation makes its own mistakes, but the cumulative experience helps us limit the damage. G. Warren Nutter said it best when he wrote: "Good judgment comes from experience, and experience comes from bad judgment." While we are relatively skilled in the extension of credit, in other areas in which we have had less experience, we sometimes fail to distinguish shadow from reality. Old habits are hard to break and old slogans die hard. Now that we are emerging into a more competitive environment, it is essential that we bring the same dispassionate analytical ability to competitive problems that we have traditionally applied to credits. The market economy has a different dynamic from a protected enclave.

We have lived most of our lives watching the regulatory shadow of "capital adequacy." This concept rests on the assumption that there is some simple ratio of capital to assets which will guarantee the safety and soundness of banking. But the voices we hear on this subject are the voices in the cave: our own and those of our regulators. In the real world outside the cave it is different. The cold reality is that no amount of capital can save a business, particularly the business of banking, if it does not earn money. Bankers have learned over many years of experience that it is management, a management team capable of earning money and maintaining the confidence of customers and investors, that pays off bank loans.

The matter is further confused by mandating different ratios for different sized banks. While this may be perceived by some as having the political charm of divide and conquer--setting one size bank against another--it makes little logical sense. Each of us is different, each of our organizations is different, and markets know this. The First Deputy Comptroller, Justin T. Watson, said it best in 1975: "There is no amount of capital that will salvage a bank which is grossly mismanaged. Conversely, a strong, well-managed bank can operate on a very thin capital base..." History has validated his words as we all know from our own experience.

This statement applies to most businesses. In the bottom of this recession General Motors, a company acknowledged to face massive foreign competition, very high wage costs, and a $5 billion capital program, lost over $1 billion, but never lost its top credit rating. In that same period, a few banks which encountered relatively small operating losses in a single quarter after achieving solid earnings for decades, had their credit downgraded both by the rating agencies and the marketplace without regard for their capital strength. As a matter of substance, not shadow, it is a historical fact that every bank that has failed in the U.S. since the 1930's was well above the capital ratios set by the regulators on the day it failed.

In a recent case, some believed the Penn Square Bank was making progress because its annual report indicated that its capital ratio rose from 7.6 percent at year end 1980 to 9.3 percent at year end 1981. We all know what happened.

Scientists are often very pragmatic when it comes to testing their ideas. Einstein, whose theories changed the way we think, urged that no one accept his theorems until they had been verified by empirical observation. Indeed, Einstein stated he would not accept his own theories of relativity if they failed the pragmatic tests of observation performed by others. To assert that some fixed ratio of capital to total assets determines the safety and soundness of a bank clearly fails to meet the pragmatic. Empirical test of what we have all observed again and again.

This is not to say there is no prudent minimum level of capital for each bank or bank holding company. There is. Indeed, there is a limit to almost everything. The only question is how those limits are set. Some are set by physical laws of mass and velocity; some, like international airline fares, by government bureaucracies. But at the end of the day, it is the market that puts limits on everything. People will pay only so much to fly to Europe. The market will accept so much cotton, so much wheat, so much silver, so much debt and so much equity. No one person knows these limits at any given time, but when they are reached, reactions are swift and sure. The market is unforgiving, and, in the case of banks, it is the market participants--depositors, buyers of stock, lenders of Federal Funds, and buyers of bonds--who will determine which providers of financial service will live or die, which will succeed and prosper. Market discipline, which is not only stronger than governments but beyond their control, is profoundly disturbing to some who wish their national currencies sold at a "better" rate, or to CEO's who think the P/E ratio of their stock is too low. It is the management of a country's monetary and fiscal policies that will determine cross rates, and no amount of reserves can stem the tide if that management is tried and found wanting. The same is true of banks and other businesses. The global marketplace is the final arbiter.

The concept that there is no simple capital ratio for any class of banks, large or small, that can guarantee soundness, is as disturbing to some as was Einstein's theory of relativity to generations brought up on the logic of Newtonian physics. The right angles and straight lines of Newtonian physics we all learned, turned out to be shadows and not reality. None of this means that prudence should ever be forgotten, or that the time-tested rules of credit and management no longer apply. What it does mean is that we have now moved into a new era in which market discipline is substituted, in part, for Reg Q and other artificial supports.

As the debate develops about the proper role of banks, another shadow on the wall has appeared which suggests that banks are "special." We hear the word a lot lately, and we are indeed special in many respects, we are "special," it is said, because the public puts its faith and trust in us to safeguard its money and supply the credit that makes our system function. This is a very real responsibility and one we all take with great seriousness. While this might make us special, it does not make us unique. The public also puts its faith in our health care delivery system for life itself, which certainly makes doctors and hospitals special.

But if we are not unique, we bankers are special in some ways with which we are all too familiar, and not too happy about. One of the ways in which we are special is that bank stocks generally sell below book value, and quite often at a lower P/E ratio than the Standard and Poor's Index. As a matter of fact, bank holding company shares this summer were at the lowest level in relation to the Standard and Poor's Index since that measure was devised. Some part of this problem may be attributable to the market's view that bank deregulation is moving so slowly that our competitors are gaining markets which could have been ours.

In a recent Forbes survey of the market value of big board companies, Chrysler, whose loans amounting to about $1 billion were written off by the world's commercial banks, ranked not far below the fourth largest bank in the U.S.

We are also "special" in that we are losing our customers to non-bank competitors at an alarming rate. If banks ever had an exclusive franchise, the marketplace has destroyed this perceived exclusivity. The old notion that corporations only borrow from banks, that people only deposit their money in banks, and that banks own the exclusive transmission belt over which the money supply flows, has been destroyed by the realities of the marketplace.

No one has to remind us that the savers of yesterday have become increasingly enlightened investors who are treated to daily reminders via the T.V. tube or full page ads of the multiple investment options available to them from security brokers, insurance companies, and mutual funds, who are free to operate what, in fact, is a national banking franchise. The savers of yesterday also have the ability to place their money in a bank anywhere in the U.S. by buying a CD from their friendly local Merrill Lynch or Pru/Bache broker.

Not so long ago, national retailers were able to sell last year's fashions through their catalogs to people in areas where there was no way to know that styles had changed. National television changed all that. Now it is our turn to face a similar national market for consumer savings.

Another shadow on the wall that we have all been taught to believe is that the Glass-Steagall Act was a law that separated banking from commerce. The reality is that no such language appears in that piece of legislation, nor any other. There are still loud voices in the cave which argue this case, but when we come into the sunlight and look around, we find that Sears as a retailer also underwrites stocks and bonds, does a banking business, and sells insurance. There are dozens of similar examples, because the law permits affiliations between underwriters and non-member banks and savings and loan associations. What it comes down to is that if we bankers don't begin to all pull together as an industry, we will have the shadows and our competitors will have the substance.

Our survival as a profitable, viable industry is now being threatened by still another shadow on the wall. This new confusion of myth and reality is launched under the banner of "moratorium"--let's not allow the untidy processes of federalism to work and permit the dual banking system to mess up an as yet unenacted national policy. This is an appeal to "Let's stop the world." Not the world of our competitors, but only our world of banking. Those who argue for a moratorium fail to read our country's history correctly. Justice Brandeis said it best in 1914 when he opined that the states should act as "political and social laboratories." And they have, starting with one of our most massive problems, the elimination of slavery. Remember John Brown and bleeding Kansas? The states took matters into their own hands because there was no national consensus. But progress did not stop there. Women's suffrage, child labor laws, pure food laws, unemployment insurance, all began at the state level. The country agreed with Justice Brandeis when he wrote: "It is America's good fortune that the federal system furnishes in the forty-eight states political and social laboratories in which these inventions may be separately worked out and tested, thus multiplying the opportunities for invention and minimizing the dangers of failure." No one ever described the dual banking system better. Today the states are once more active in their roll of "social laboratories" and in the great American tradition of federalism.

The last shadow we are now seeing on the wall is the perception that the interests of community banks are different from those of regional banks, and those of regional banks different from those of money center banks, and finally, that commercial banks have a different set of priorities than the thrifts.

When that shadow first appeared on the wall it did reflect some reality. Before the age of telecommunications, international credit cards, Merrill Lynch's CMA accounts and Sears financial centers, a banker might with some justification speak of "my market" and resent other bankers who invaded his or her turf. But old rules rarely reflect current technology, just as old physical laws are being found not to be immutable. When, for example, the Federal Communications commission assigned each land mobile radio licensee a 25 kilohertz band, it assumed that the licensee would use FM transmission on one channel because that was what was possible with the technology of the day. Today five transmissions, instead of one, can be broadcast from one 25 kilohertz assignment.

What else will happen as we move into the sunlight of modern science? We are all to some extent the prisoners of yesterday and, as Plato said, it is always hard to believe that the old shadows are not contemporary reality.

Often, in the past, we have seen ourselves as engaged in a wrestling match among ourselves, and have become so engrossed with internecine warfare that we somehow lost track of the reality outside of our own little cave--the real world where the Merrill Lynches, the Sears, and the American Expresses began taking away our customers.

If we walk a little further out into the sunlight we will see a whole new group of companies aiming at our market. Ma Bell and Uncle Dow Jones, to name but two who are surely tomorrow's competitors. Information about money has become almost as important as money itself, as evidenced by the explosive growth of electronic banking. It does not take any great leap of imagination to see that the Reuters, the Dun and Bradstreets, and the Dow Joneses with their terminals in our banks and our customers back offices now have everything they need to look like a bank except a clearing mechanism. As we all know, Merrill Lynch solved that mechanical problem with the help of Bank One. Can any among us still believe that these companies, which are far ahead of us in electronic technology, cannot solve the clearance problem in some similar way?

It was not a shadow on the wall, but a flyer in the mail that got my attention recently from Stein Roe Funds. It offered me a free checking account with $100 minimum, tax free interest, no penalty for early withdrawal, free telephone exchange with nine Stein Roe Funds, plus other features. They make our customers an offer that is hard to refuse, and one it is hard for your bank or mine to match. Those flyers go wherever the mail goes--into your market and ours. This is the new reality.

We have been a little like those people in Gulliver's Travels who fought a war over whether the soft-boiled egg should be opened from the small end or the large end. While we are fighting our war, somebody stole the chicken.

Perhaps it is time for us all to stand together and demand the right to compete to hold our customers. We are all moving outside the cave together now and the old internecine warfare is as outdated as the regulations. It is hard not to refight the old wars. For the health of our industry, which has an old and honorable history, let us not be guilty of confusing the old shadows with the new substance.

If we can do this, I believe with the late Herman Kahn that we "may see a creative and splendid new synthesis on what man and society are about. Whatever that future society chooses to do," Kahn believed, "it has the kinds of opportunities that no human group has ever had before..."

I believe that if we stand together, we can not only share in this dream, but that we can play an important role in making it all happen.

Thank you.