This isn’t my typical “thing”….normally I write about life, leadership, and growing up in the Deep South. But I had the privilege of addressing the Huntsville Downtown Rotary Club last week on this topic and I was happy they didn’t stop listening before I stopped talking….it probably won’t win a Nobel Prize for Economics, but for those of you who pay attention to such things here’s my short take on the outlook for banking.
If you ask the average consumer “do we have enough banks in our market?” the likelihood is you will get a “Yes!” Ask them if they believe they get great service from their bank and chances are you will get a resounding “No!” Mark Twain’s observation that a banker was a man who would loan you an umbrella when the sun is shining and ask for it back when it begins to rain seems to be the perspective of many today. So roughly six years after the financial crisis hit, one wonders where banking is headed in Alabama and the world.
The good news North Alabama and the state were less adversely affected by the financial crisis than other parts of the country. While we’ve seen our share of mergers, acquisitions, and even a few big bank failures, our problems haven’t been as widespread largely because it was not as “sexy” as a growth market. Alabama’s economy has been less volatile than “boom & bust” places like Las Vegas, Phoenix, and Coastal Florida and that has been good for banks and customers. Banks are generally “sold” rather than bought as the result of leadership succession problems, an absence of growth, or inadequate capital. But there are some changes consumers and business can anticipate and they are driven by places as far away as Basel, Switzerland, other parts of Europe, and even, or especially Washington, D.C.
In Basel, G20 banking regulators gather to formulate rules about limiting bank risk. They meet to try and limit complex systemic risks by gaining agreement on minimum capital and liquidity standards. Those rules, when adopted by member nations, limit the amount of money banks can lend by requiring them to keep various capital to asset ratios. In turn, those banks affected by such rules, particularly those with international exposure, have higher regulatory compliance costs to cover as well as having less money to lend. They, like all banks, are looking for a place to generate more fee income, thus, along with Dodd-Frank’s implications create more of a “pay as you go” proposition for bank products. So making money in this environment is all the more of a challenge for banks. Adding to that challenge is the historically low interest rate spread, the difference between what bank’s pay for money and the yield at which they loan or invest it. The only way to overcome that compression is to lower costs (fewer people and facilities), lower losses (less lending) and to charge more fees. Fortunately, the industry has weathered the worst of the storm. But the seas ahead remain choppy.
Consumers will continue to see the words “free” missing from bank offers. Branches will still be a part of the strategy, but e-based delivery channels will proliferate and technology will allow smaller banks to be more nimble and deliver the product suites of much larger organizations. Loan decisions will be more judicious. Big banks will likely get bigger as shareholders seek efficient use of their capital. Smaller banks, or those keeping decision-making and risk management closest to the customer, will find both those customers and their shareholder very happy indeed.
The views expressed here are mine. All mine….mine, mine, mine!