Region Focus, Winter 2005

Winter 05 FINAL Covers1/21.ps - 1/21/2005 8:12 AM WINTER 2005 THE FEDERAL RESERVE BANK OF RICHMOND BANKS BRANCHING OUT . It’s All About Location, Location, Location Shame and Bankruptcy ACC Shuffle • Inflation Targeting Debate Winter 05 FINAL Covers1/21.ps - 1/21/2005 8:12 AM VOLUME 9 COVER STORY NUMBER 1 12 WINTER 2005 Branch Bonanza: They cost a lot, but customers can’t get Our mission is to provide enough of them. Why bank branches won’t go away authoritative information Bank branches are expensive to build, maintain, and staff. So how and analysis about the come the number of bank branches keeps right on growing? It turns Fifth Federal Reserve District out that customers aren’t ready for virtual banking just yet – and economy and the Federal banks that are following their customers’ lead are being rewarded Reserve System. The Fifth with both deposits and profits. District consists of the District of Columbia, FEATURES Maryland, North Carolina, 18 South Carolina, Virginia, The Conference Shuffle: The Atlantic Coast Conference set and most of West Virginia. off a wave of league swaps The material appearing in In 2003 the ACC plucked three schools from the Big East. Within Region Focus is collected and developed by the Research months, another 16 schools switched conferences. It all makes sense Department of the Federal from an economic perspective. Reserve Bank of Richmond. 23 DIRECTOR OF PUBLICATIONS Sink or Swim: Fifth District coastal ports must continue to John A. Weinberg expand to remain competitive EDITOR Port authorities in Baltimore, Md.; Charleston, S.C.; Hampton Roads, Aaron Steelman Va.; and Wilmington, N.C., have invested heavily in infrastructure SENIOR EDITOR Doug Campbell improvements and expansions. These investments have been essential to respond to bigger ships, higher volumes of cargo, and greater use MANAGING EDITOR Kathy Constant of containers. BUSINESS WRITERS 28 Charles Gerena Betty Joyce Nash Shame and Bankruptcy: The number of Americans filing for EDITORIAL ASSOCIATE bankruptcy protection has surged fivefold in two decades Julia R. Taylor A Richmond Fed economist challenges the conventional wisdom CONTRIBUTORS that increasing bankruptcy rates are attributable to falling stigma, but Joan Coogan the debate is far from over. Eric Nielsen Christian Pascasio 32 Jennifer Wang ECONOMICS ADVISERS Hard Times: North Carolina’s northeast counties are among Andrea Holland the poorest in the nation. Can they reverse course? Robert Lacy This region of North Carolina is too far inland to gain from the coastal Ray Owens construction boom and too isolated from big cities to benefit from CIRCULATION their diverse job mix. Instead, it’s piecing together an economy of its Walter Love Shannell McCall own, using natural assets along with state money to bring in jobs. DESIGN 36 Ailsa Long Happy Trails: Horses are used more for pleasure than Published quarterly by the Federal Reserve Bank business but still have a place in Fifth District agriculture of Richmond The horse industry encompasses a variety of recreational activities P. O. Box 27622 and generates millions of dollars throughout the Fifth District. The Richmond, VA23261 E-mail: animals that once served farmers as beasts of burden are now sources [email protected] of companionship and enjoyment. www.rich.frb.org/pubs/regionfocus Subscriptions and additional DEPARTMENTS copies: Available free of charge by calling the Public Affairs Division at (804) 697-8109. 1 Noteworthy/Does Deregulation Undermine Stability? Reprints: Text may be reprinted 2Federal Reserve/Inflation Targeting with the disclaimer in italics below. Permission from the 5 Legislative Update/Manufacturing and Tobacco editor is required before 6 Jargon Alert/Sunk Cost reprinting photos, charts, and tables. Credit Region Focus and 7Research Spotlight/ Is Good Journalism Good Business? send the editor a copy of the publication in which the 8 Short Takes reprinted material appears. 39 Economic History/The Border Line and the Bottom Line The views expressed in Region Focus are those of the contributors and not 42 Interview/Frank Sloan necessarily those of the Federal Reserve Bank of Richmond or the Federal 46 Book Review/The New Division of Labor: Reserve System. COVER: How Computers Are Creating the Next Job Market Skyline of Charlotte, N.C., ISSN 1093-1767 one of America’s banking hubs 48 Regional/District Economic Developments PHOTOGRAPHY: ANNE RIPPY/GETTYIMAGES 56 Opinion/The Broken Window Fallacy RF Winter 04 FINAL.ps - 1/10/2005 13:56 PM NOTEWORTHY Does Deregulation Undermine Stability? ne of the Federal Reserve’s Deposit insurance programs presented a moral hazard most important duties is problem: Some banks got too big too fast, secure in the Oto make sure that the na- knowledge that there was a safety net to protect them from tion’s financial system is stable. bad business decisions. The problem was particularly acute in But how should we and other heavily agricultural states, where banks loaned freely during bank regulators go about achiev- the agricultural boom of 1914 to 1920, but faced hard times ing this goal? That’s a large and when farm goods prices began to fall. In fact, all the state complicated question. deposit insurance fund systems collapsed during the 1920s. In many ways, the banking Meanwhile, branch banking proved quite successful. As industry in the United States was Columbia University economist Charles Calomiris has writ- shaped by the events of the 1930s. ten, “States that allowed branch banking saw much lower The collapse of a number of failure rates — reflecting the unusually high survivability of financial institutions led to regulations that limited the activi- branching banks — and responded well to the agricultural ties of banks. This was meant to shelter them from risk and to crisis by consolidating banks and expanding branching sys- prevent additional collapses. At the same time, efforts were tems, where this was allowed.” made to protect the consumer from another wave of bank fail- Consider an example from the Fifth District: South ures. In particular, the federal government began insuring Carolina. Its economy, like those of other primarily agricul- deposits through the Federal Deposit Insurance Corporation. tural states, was hurt by the drop in farm prices during the A quick glance at the post-Depression history of the 1920s. But its banking system stood up relatively well — as banking industry would seem to vindicate these decisions. did the banking systems in most other states that Until recently, many of the regulations that went on the permitted branch banking. books in the 1930s were still in operation — and overall, the The success of branch banking may seem counterintu- industry has been quite stable, with relatively few failures. itive. It might appear that a bank with branches spread But does this necessarily mean that such regulations were throughout a region is especially risky since that bank often the best — or only — course of action? I don’t think so. has more to lose than a bank with just one office. But the In fact, research suggests that the collapse of the 1930s very fact that a bank has a large and diversified portfolio could have been averted — or at least would have been actually enhances its stability. Its risk is spread over a wider considerably less severe — had the regulation of the banking pool, meaning that if business is ailing in one area, others industry been less restrictive prior to the Depression. As the may remain healthy. cover story in this issue of Region Focus discusses, branch In contrast, the more geographically concentrated a banking has grown dramatically in the United States in bank’s depositor base and lending clientele, the more risk it the past decade. Freed from regulations that confined their faces. In such a world, if one segment of its customers is business activities to specific states or geographic regions, facing problems, it’s likely that other parts are as well. This some banks are now operating on a nearly national scale, can put a bank under severe, and perhaps fatal, pressure — and with branches throughout the country. is arguably what happened to many banks during the 1930s. At first blush, such expansion might seem like a poten- So, overall, I think that we should look at the deregula- tially risky phenomenon. After all, the bigger an institution tion of the banking industry and the resulting rise of inter- gets, the more it has to lose, right? At one level this is correct: state branch banking as a welcome occurrence. The U.S. The collapse of a large bank with branches in numerous financial system, I believe, will become more efficient over areas would pose a significant problem to the nation’s finan- time. And for the reasons I have discussed, I think it also will cial system. become more stable. Both are healthy trends for consumers. But the data pose an interesting problem for proponents of regulation. Prior to the Depression, some states pro- hibited branch banking while others allowed it. In addition, some states already had deposit insurance programs of their own. How did the different states fare? On balance, banks in states that permitted branch banking and did not adopt JEFFREY M. LACKER deposit insurance programs performed better than banks in PRESIDENT states with tighter regulatory environments. FEDERAL RESERVE BANK OF RICHMOND Winter 2005 • Region Focus 1 RF Winter 04 FINAL.ps - 1/10/2005 13:56 PM FEDERALRESERVE Inflation Targeting BY JENNIFER WANG The debate over n January of 1995, the Federal Open to institutionalize monetary policy. Market Committee (FOMC) held They believe implementing a formal best-practice Ia debate on inflation targeting. Al inflation target will cement the hard- Broaddus, then-president of the won gains of price stability throughout monetary policy Richmond Fed, presented arguments leadership transitions.

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