Everyone likes to predict the future.
The best way to do it, of course, is to predict for a time far enough in the future that no one will remember if you were wrong.
It is a lot safer to predict what interest rates will be in 1999 than what they will be on Thursday.
A further tip that forecasters give to others in the prediction field is that if you are going to predict, predict often--so you are not tainted by one forecast.
Be this as it may, we still predict.
Commercial Loans, Farewell
In the year 2000, what will commercial banks will look like?
Several points come to mind immediately.
First, banks will rely less and less on commercial loans as the backbone of their operations. There are several reasons for this:
* More competitors are in the market for these credits, notably Wall Street firms, which offer direct financing, as well as foreign banks and other foreign lenders.
* Because of an increase in the legal rights of borrowers, there has been an erosion in lenders' ability to repossess assets and get repaid.
* Securitization procedures allow the banks to make loans and earn fees without tying up precious capital in holding commercial loans.
The result of these factors is that many banks depend more and more on the sale of talent, expertise, and service for their income.
But as banks diversify, they bump into legislative road-blocks.
Every other industry can diversify into numerous fields, including areas of banking. But when banks try to diversify into other fields--notably insurance and securities--they're restrained by the law.
It is not just the strong lobbyists of the insurance industry and securities industry who bring this about. It is also a feeling on the part of many lawmakers that banks are different--that constraints are the price for the deposit insurance they get.
The result is that many banks may well give up this insurance to obtain the freedom to diversify.
Just as some strong banks have written off entire LDC portfolios so no regulator could hassle them about such credits, some banks already talk about giving up the insured deposit function in exchange for the freedom to do what other companies do.
Two Varieties
There is a possibility, then, that we may see two types of banks.
One type would still have deposit insurance, offering low rates on deposits because of this 100% safety.
These banks would place their deposit funds into extremely safe assets. Customers would use these banks largely to satisfy payments needs without subjecting deposits to the risk of bank failure.
The banks themselves would be little more than local money fund managers, basically providing safe mortgage loans and other secure credits - as community banks and thrifts used to do, before the world of deregulation overcame us.
What about the banks that went without deposit insurance? What would they do?
Many would specialize in the provision of technical services such as top investment bankers provide. But these banks would be willing to provide them for smaller companies and concentrate on their own regions, instead of looking for national operations to service, as investment bankers do.
Others would undoubtedly get into the insurance field, for insurance and savings are becoming more and more intertwined.
In sum, many feel that just as we used to have specialized financial institutions - some in commercial banking, some in mortgages, some in insurance, and some in consumer lending - we may be going back to such a structure.
Long Shadow of S&L Crisis
In many ways this is sad, as the public is better served by a full-service organization.
But at least for the present, the lawmakers feel that it was the thrifts' efforts at diversification into everyone else's field that brought about the savings and loan debacle.
Also, the lobbyists for the groups that would face new competition from bank diversifications help reinforce the lawmakers' thinking in this regard.
Would we have community banks? You bet!
All that most Americans want from a bank is a place for savings and checking services, a place where a borrower can get a mortgage or a consumer loans.
There is nothing to indicate that a community bank that knows it people will be at any disadvantage in providing these services when put up against giant organizations.
To many people, an operating ATM is all the bank they need. But far more still like to feel that a banker knows them and will help them understand the complicated world of personal money management.
A Place for Community Banks
Therefore, as I see it, the community bank will survive, despite the threats from outside. And while their numbers may fall somewhat, there will still be thousands left. We will not see them swallowed up by national or regional giants as some have predicted.
Maybe these banks will use the word "commercial" less often in their names, and maybe they will have fewer commercial lending officers and more personal advisers and money managers on their staffs. But the local bank will not vanish. Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.
