Capital Briefs: Fed Governor Says Cost Cuts May Backfire

Federal Reserve Board Governor Susan M. Phillips said Sunday that regulators must monitor how cost-cutting pressures affect the industry.

Ms. Phillips, addressing the Conference of State Bank Supervisors in San Antonio, said if banks cut costs too "ruthlessly," they may undermine employee morale and commitment.

That can cause trouble, she said.

"As a central banker and a bank supervisor, I have seen many cases where institutions failed - and even where markets were jolted - because employees were poorly trained, supervised, or committed to their work, or because executives themselves had only short-term self-interests in mind," she said.

Ms. Phillips also said that state supervisors should reassess their operations as interstate branching kicks in.

"National banks could have a material advantage if their supervisory and application procedures are much more streamlined than those for state- chartered banks," she warned.

State and federal authorities should coordinate their interstate efforts to avoid redundant, costly, and inefficient examinations, she said.

Finally, she said bankers must improve how they analyze and price credit risk. "Otherwise, banks will continue to repeat the same mistakes of reducing prices and credit standards in good times and then suffering when the bad times come," she said.

Nonbanks will continue to grab more business unless banks improve their performance in this area, she said.

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