WASHINGTON - Commercial banks, which only a few years ago seemed to be headed the way of the comer grocery store, have been restored to full health as a central provider of ffnancial services in the U.S. marketplace.
That message was conveyed loud and clear at a hearing last week of the Senate Banking Committee, chaired by retiring Sen. Donald Riegle, D-Mich. Riegle, who once got his share of bad publicity for his role in the Keating Five savings and loan scandal, closed out his 28 years in Congress under a shower of compliments from his Republican and Democratic colleagues for his leadership in banking legislation.
He also collected a round of praise from the nation's bank regulators, who reported that the banking industry is again profitable and sound.
Federal Reserve chairman Alan Greenspan said banks have enjoyed an "amazing" comeback since the dark days of the late 1980s, when failures and loan losses were the order of the day. It was a time of sour real estate deals, Third World debt, and a braising collapse in energy and farm prices in the Southwest. Interest rates were high. Escalating federal regulations and the 1990-91 recession added to banks' woes and choked off lending. Bank stock prices were in the cellar.
Today, banks are racking up record profits and are back in the traditional business of lending. The Federal Deposit Insurance Corp. reported that secondquarter bank earnings hit $11.2 billion, the second highest ever.
Equally important, banks are now holding their own against the competition from securities firms, insurance companies, and other providers of financial services.
"The U.S. commercial banking system remains the centerpiece of the nation's financial system," Greenspan told the panel.
Traditional studies of banking have painted an industry in decline. Bank assets accounted for 34% of all claims held by financial institutions in 1992, down from 46% in 1974. Other types of lenders, notably finance companies, increased their market share.
But a study by John Boyd, senior researcher at the Federal Reserve Bank of Minneapolis, and Mark Gertler, an economist at New York University, concludes that such measures understate the role of banks.
Boyd and Gertler noted that with deregulation and financial innovation, banks engage in a variety of off-balance sheet activities that are not counted in official tabulations of lending.
These activities include auto loans and mortgage loans that are often packaged and resold as securities to other financial institutions. There are also lines of credit, for example those that back up commercial paper issued by eorporations, and dealing in derivatives the burgeoning line of financial contracts that base their value on bonds, stocks, or other assets.
In addition, Boyd and Gertler noted that many foreign banks operating in the United States make loans to U.S. customers but book the loans overseas for tax or other reasons. In 1993, such unreported offshore loans totaled a whopping $175 billion.
Greenspan endorsed the findings by Boyd and Gertler, along with similar research by the American Bankers Association, in a speech at Boston College and again when he testified before the Banking Committee.