1999

Long Boom Burnishes Public Image of Banks; Few Doubt Their Safety

By Scott Barancik

August 9 — As the economy goes, so goes American consumers' confidence in banks and the banking system.

Over the last seven-plus years of U.S. economic expansion, the public's faith in the health and safety of banks and the financial infrastructure has gotten consistently stronger, according to surveys commissioned by American Banker.

In the latest poll conducted for the newspaper by the Gallup Organization, nine out of 10 people, a higher proportion than in any of 14 previous national telephone surveys, rated the nation's banking and financial system as healthy.

They show bankers basking in the same glow that keeps everything from stock market averages to the Conference Board's economic confidence indexes to President Clinton's job-approval ratings at high, even all-time-high, levels.

Perhaps those good feelings can help commercial banks stem the tide of market-share losses to securities brokers and mutual funds. These competitors, other American Banker/Gallup results indicate, do not measure up to the same level of public trust that banks enjoy. (See other articles in this special report.)

There is a caveat: The American financial consumer has held banking health in high regard in other periods of economic strength, but that did not prevent inroads by nonbanks. And when the economy turns sour, so can these good feelings. That happened in the 1991 recession, when consumers, with the collapse of much of the thrift industry still fresh in their minds, were almost evenly divided on whether the financial system was healthy.

The banking-approval ratings have risen so high that any change from here is likely to be in the opposite direction, which some observers see as a cause for alarm.

Since the last American Banker survey was conducted, in October and November of 1997, there occurred a presidential impeachment, an economic crisis in Asia and in developing countries elsewhere, military escalations in the Middle East and Yugoslavia, the biggest mergers in banking history, and storm clouds of concern about the ability of the economy and the business community to deal with year-2000 technology glitches.

Meanwhile, the proportion of the roughly 1,000 respondents in each poll who considered the banking and financial system fairly or very healthy rose to 89%, from 85% in 1997.

Those who deemed it unhealthy dropped to 9% from 11%, and the undecideds were whittled down to 2% from 5%. (The percentages are rounded, and the margin of error is plus or minus 3 percentage points. Each respondent has at least one banking, transaction, or loan account. People who do not, the "unbanked," are excluded from the survey.)

"The American public seems to be focused on the domestic bottom line," said Charles W. Calomiris, a Columbia University finance and economics professor. "They seem to be able to disentangle the financial position of the banks from the broader crisis-reporting spree about the global financial system."

"It does represent a challenge for the industry," said James A. Sexton, the Federal Deposit Insurance Corp.'s director of supervision. He said banks would have to work hard to "continue to merit that sort of confidence."

Diane C. Swonk, deputy chief economist at Bank One Corp. in Chicago, was struck by "how little evidence there was" that year-2000 worries were affecting confidence levels. She said she saw cause for alarm in reports of "people putting money in their mattresses because of Y2K."

"Anyone reading the headlines had to be concerned," she said.

Instead, the industry continued to recover, as it were, from the nadir of 1991 and 1992, when 51% deemed the banking and financial structure fairly or very healthy.

That "health index" climbed to 64% in 1993, 77% in 1994 and 1995, 78% in 1996, 85% in December 1997, and 89% this year.

The last number puts the ratio of "healthy" to "unhealthy" responses at 10-to-1, a gap rarely encountered in polling of this kind, and never before on this question.

Before the current run-up, the peak of optimism was 74%, in 1985, when the "unhealthy" responses numbered 22%.

"I think the positive numbers reflect the healthiness of the economy," said Christine Chmura, senior economist at Capital Research and Analytics of Richmond, Va. "Clearly, a recession would change that picture."

"What amazes me about these confidence surveys is that they are always a mirror image of the unemployment rate," said David Orr, chief economist at First Union Corp., Charlotte, N.C. "I think people extrapolate their own personal well-being to the institutions of the economy."

Within the statistical compilations supplied by Gallup, the Princeton, N.J., company that has been working with American Banker since 1991, are some intriguing patterns.

Men have a rosier view than women. Of 532 male respondents, 31% called banks "very healthy," compared with 22% of the 470 women. The men were simply more willing to give the more extreme opinion, as they have been year after year. (The sexes were equal in "unhealthy" responses, at 8%.)

Averaging out all responses, 27% rated the system "very healthy," up from 25% in 1997 and another record.

On a question somewhat different from the one about the health of the banking and financial system, pertaining instead to levels of confidence in the banking system's safety and security, 38% said they had a "great deal" of confidence, and 51% had "some." The total, 89%, was down one point from 1997, a statistically insignificant difference.

The gender gap showed up here too, as 43% of men said they had a "great deal" of confidence, versus 33% of women. (Just 3% of men and 2% of women said they had no confidence in the system's safety and security.)

"My guess is that it is partly because of income differential," Ms. Swonk said.

There are, indeed, demographic correlations with these consumer attitudes. Optimism tends to improve with advancing education, age, and income levels.

Of people with no more than a high school education, 87% said the system was at least fairly healthy and 82% had some degree of confidence in its safety and security. For college graduates, those numbers were 90% and 92%; for postgraduate achievers, they were 92% and 95%.

Such differences were more pronounced in the extreme responses. For example, 28% of the high-school-or-less group had a "great deal" of confidence, compared with 54% of the postgraduates.

Of people 18 to 34, 21% considered banks and banking "very healthy." That rose to 28% of those between 35 and 44 and 31% in the 55-to-64 range.

Consumers reporting household incomes above $75,000 a year were nearly twice as likely as those earning less than $40,000 to call the banking system "very healthy" - by 41% to 22%. The income group in the middle came in at 25%.

"Maybe (the higher earners) understand the system better, use it more, and therefore have more trust in it," Mr. Orr said.

"You're more insecure when you're lower-income, because when you lose it, it means a lot more," Ms. Swonk said.

Underlining the optimism in this year's survey is the fact that the total "health" score of 89% for the first time equaled the "safety" score.

The concepts are nevertheless distinct in consumers' minds. In the 1991 survey, for example, the low "health" score of 51% was fully 25 percentage points below the "safety" score.

Mr. Calomiris said people would tend to see "safety" as a proxy for deposit insurance and "health" as representing industry well-being. Today's parity suggests consumers view the banking industry and its deposit insurance as equally reliable, he said.

"That fits in with the concept of, 'It doesn't matter if they're healthy, (because) they're still safe,' " Mr. Orr said.

1958

Bank's Tobacco Display Stimulates New Business

July 2 — A new departure in displays by a bank has stimulated so much interest among its customers and the general public that the bank has decided to continue with similar ones.

James Brooks, president, Atlantic Bank of New York says the windows displaying Greek foods in recent weeks in connection with Greece’s exhibit at the U.S. World Trade Fair created so much favorable comment that the company displayed a similar window devoted to Greek tobacco.

The Atlantic Bank is the outgrowth of a merger four years ago of the Hellenic Bank & Trust Co. and the Bank of Athens Trust Co.

1974

Making Bankers List Their Outside Interests

WASHINGTON, June 7 — Comptroller of the Currency James E. Smith issued Friday for comment a disclosure regulation to tighten controls on self-dealing by officers and directors of national banks. It will require bank managements to list outside business interests for bank examiners.

The affiliations would still be kept from the public and there would be no requirement for management to make the list available outside the bank.

A spokesman for the Comptroller said the reasoning behind the regulation was that it should function like an office account. He said the list would be obtainable by subpoena.

The move to tighten control on outside business interests of bankers follows directly from a Comptroller-Federal Deposit Insurance Corporation investigation into the collapse of the $933.8 million deposit United States National Bank, San Diego, last October, which revealed that the bank's chairman, C. Arnholt Smith, had made hundreds of millions of dollars of loans to companies in which he had sole or partial ownership without detection by national bank examiners.

Reaction to the collapse has spurred the Comptroller and other regulators to seek tighter regulation in several areas. In January, the Comptroller, the Federal Reserve Board and the FDIC joined in proposing that banks be made to classify standby letters of credit as liabilities and account for them under lending limits. That rule, which is still pending for revisions, resulted from a finding that letters of credit were widely used by Mr. Smith to secure loans for his companies.

The self-dealing regulation would take effect Jan. 1 and would require that business interests of any type be disclosed. Transactions between the bank and the business that would be listed include loans, check, cash or other advances, sale of notes between the company and the bank and the issuance of acceptances, letters of credit or other obligations benefiting the company.

A banker or bank director would have a legal interest in a business if he or his immediate family owned 5% or more, or could influence the management of the company indirectly. Bankers borrowing $100,000 or more from a company would also be considered to have an interest.

Another section of the regulation would require the reporting of a material change between the bank and the business. A business increasing its deposits with a bank by 25% or more would fall in that category, according to the regulation.

Banks were given 30 days to comment on the rule. They would be required to provide management and directors with a new Federal form, Form CC 8013-06 for keeping track of affiliations. The reports would be updated annually, and kept on file for two years after an official left his position.

Self dealing is not a crime under banking regulations now and it would not necessarily be with the new rules although it frequently leads to abuses. A copy of the regulation said that "unsafe and unsound banking practices frequently are associated with self dealing by the bank's managing officials," however, and that it commonly results in "the extension of credit on an unsound basis."