It's inevitable that whatever walls now exist between various kinds of financial institutions in the United States, they are going to come down. The question is not whether they will, but at what pace, what scope, and under what conditions.

You're seeing evidence of it already. The famous accounts[26] , which started in Massachusetts, are going west like the covered wagons. The practical distinction between a savings institution and a commercial bank is disappearing.

It used to be that we all had our little pockets. The savings banks now think they want checking accounts; they want credit cards; they want to make personal loans-- and all of these things are taking place. So, in the near future it will be difficult to see any difference whatsoever from the customers point of view. But not the banker's. It's one thing to attract savings by setting up a display of dishes or a Waring Blender. It's another to absorb the cost of processing checks.

I think the spreading of services is good. It increases competition and, therefore, serves the customer. But how we get from here to there is a critical management problem. What's happening now is that the structure is getting picked apart one state at a time.

The thing that's inevitable is that the geographic containment of financial institutions, which was embedded in the McFadden Act, is going to go away.

The irony of history is that the National Bank Act of 1863 failed to provide for branches of national banks. So Congress, in a burst of liberalism, passed the McFadden Act to make explicit that a national bank could open surrounding branches. By accident, a law designed to expand banks beyond a single building was turned into one that restricted banks to a single state.

It's an obsolete law because everything has grown. No one bank in the country can supply all the credit needs of a corporation today. Legal lending limits prevent that. Companies like General Motors or General Electric borrow a billion dollars at a crack. It takes thirty or forty banks. You have to go across state lines to handle it. The growth of LPOs[27]  came from the sheer necessity of syndicating credits, because no single bank has the horsepower to finance a major corporation by itself. This is slowly breaking down the geographic distinctions that used to exist.

The growth of electronic funds transfers has also helped to make geography irrelevant. It's already acceptable to move funds, or skills, or data across state lines. Why not branches?

The biggest change coming is the way customers will be served--electronically. When banks eventually branch nationwide, they won't look like bank branches anymore. There isn't any way with real estate taxes going up, with rents going up, with land going up, and with salaries going up that it's economically viable anymore to run a large traditional branch system. They're a high-cost operation. We built a bunch of Taj Mahals because it was perceived that a big building with granite pillars and a lion or two outside looked like a solid bank. But a generation has passed since people worried about that a lot, and a new generation of technology has arrived.

What we're seeing now are minibranches opening up in storefronts with terminals to do routine banking, and some well-trained people to assist with complex transactions. So, the delivery of services to the consumer is going to change dramatically because the consumer is entitled to a better break, and because the costs are eating everybody alive.

The next big area of change is private placements and other merchant banking services. The skirmishes here are between the commercial banks and Wall Street.

In the United States, during the disaster of the early 1930s, most of the money lost in the banking system was lost by the security affiliates of the major banks. So they were split apart by the Glass-Steagall Act.

In Europe however people are still accustomed to dealing with their bankers for both capital and short-term lending needs. So it was pretty obvious that if we were to supply the needs of our customers abroad, we'd have to develop a merchant banking capability there or lose them to foreign banks that did. Most big U.S. banks did in fact do that, some successfully and some not. These banks also provided a function which is called "underwriting" in Europe, but really isn't because most of the issue is pre-sold and most of it is syndicated loans. That thing moved back into the United States, and U.S. brokerage and investment firms began yelling "Glass-Steagall!"

Citibank filed a letter with the Securities and Exchange Commission saying that we have no interest whatsoever in the brokerage business. We got an acknowledgement from the SEC saying, "Is that what you said?" And we wrote back "Yes, that's what we said."

The reason is, basically, that we can't figure out how to make any money in the brokerage business. All you have to do is look at the casualties on the Street in the last few years. You could put in your eye all the brokerage business there is.

The second facet of that business however, is another thing altogether. From our first year in business skilled men and women, the lending officers at Citibank, had been putting together complicated financial packages for large corporations, combining long and short-term debts. We had been making the short-term loans and, after doing most of the spadework ourselves, simply handing over the long-term business to someone with a meter on his desk. So, we decided to go into the private-placement market ourselves and simply move the meter from that fellow's desk to our own. Today we are actively in that business.

Is that in conflict with any regulations? Surely not. In fact, one of the big utilities came to us recently and said, "We'd like Citibank to make a $400 million private placement" and the SEC gave us formal permission to do that. I think the trend now is toward more and more private placements by commercial banks.

Another facet, of course, is underwriting corporate securities. We have no interest whatsoever in that kind of domestic underwriting in the Citibank. Some other banks do, and some have shown an interest in the brokerage business, as well. But we recognize a conflict, if some of the proceeds of an underwriting are used by the customer to pay off short-term loans with us. In today's value system that's unacceptable in this country. One of the biggest policing jobs we do is to make sure that the underwriters of CIBL--that's our merchant bank in London, one of the largest underwriters in the market--do not sell any bonds or notes to any trust accounts in Citibank. That's number one; two is seeing that the proceeds don't go to bail out some loan in one of our branches.

I would say one other thing about the impending financial revolution. What we have now is a hodgepodge of laws designed to protect various monopolies. We also have litigations in forty-eight states. What we don't have is time to waste.

Citibank operates the largest on-line terminal system in the world, but it's all in one state. Meanwhile, Master Charge is going into computer switches all across the country.

So, there's no longer time to argue about which financial institution should carve up which market. That's yesterday's question. Tomorrow's question is: How do we homogenize the total market to give our customers the best possible service at a cost that they can afford to pay?

[26] Negotiable Order of Withdrawal accounts extend checking-like privileges to interest-earning savings accounts.

[27] Loan Production Offices outside a bank's home state, assist in making commercial loans but, by law, cannot accept deposits.