Last month the American Bankers Association held its annual convention in Boston. In addition to bidding adieu to its capable but now departing president, Ed Yingling, the convention served its usual role as a gathering place for banking thoughts, ideas and concerns.
Perhaps the most disturbing concern expressed was that banking appeared to be changing to the point that bankers wondered about their personal futures and the future of the industry.
Typical questions included: "Can a bank our size continue to operate?"; "How will I find the talent necessary to meet all the new requirements?"; and even "Does community banking still have a future?"
Bankers indeed face a worrisome barrage of new regulations and oversight as a result of the recently enacted Dodd-Frank bill. They face a new agency charged with writing consumer regulations; expanded responsibility for all banking regulators, with particular emphasis on higher capital standards and tighter lending standards, and the unsettling reality for historic thrifts of knowing that their regulator soon will be merged out if existence.
But before we decide that the challenge is too great and it is time to get out, just remember, we have been here before, and we survived. In fact, we survived and prospered.
Let's review some of the most challenging times for bankers and how the industry adjusted and fought back.
In the late 1970s and early '80s, inflationary pressures took interest rates through the roof. In today's environment of benign inflation, it is hard to recall that in January 1981 fed funds peaked in the 19% to 20% range. At that time, banks were still locked into a regulatory environment that limited them to offering a maximum rate of 7.5% for savings, and even that was only available on six-year certificates of deposit.
When that regulation was loosened and banks gained the ability to pay closer to market rates on savings, many institutions were hampered by fixed-rate loans earning single-digit rates. Despite these apparently dire circumstances, most of the industry survived.
A generation of bankers schooled in the 1950s and 1960s had learned their trade in an environment when rates were fixed on both sides of the balance sheet. Deposit rates were fixed by Regulation Q, and consumer loans by state usury laws.
By the mid-1980s Reg Q was gone, and usury ceilings had either been repealed or subjected to adjustment based on market pressures. Banking changed forever, and the term "asset-liability management" was introduced into the industry lexicon. Instead of a static, inflexible rate structure, banks now learned how to set loan and deposit rates consistent with market pressures and with the need for a healthy net interest margin.
But this lesson was learned just in time to face the next crisis — caused by the collapse of the farm economy and — shortly thereafter — the commercial real estate and energy sectors.
Banks in states dependent on those three industries were severely affected. In Texas alone, where those industries make up a significant share of the state's economy, 368 banks failed from 1982 to 1989.
The thrift industry, which had made significant adjustments to survive the high inflationary pressure of the preceding crisis, now faced massive credit problems, which overwhelmed the FSLIC deposit insurance fund and forced a merger with the FDIC fund.
An enraged Congress responded to that crisis in 1989 by passing, first, the Financial Institutions Reform, Recovery and Enforcement Act and then, two years later, the Federal Deposit Insurance Corporation Improvement Act. These laws added a stifling amount of regulation, highlighted by "prompt corrective action" procedures that specified regulatory mandates for institutions whose capital fell to certain levels.
The prompt-corrective-action provision could only have been interpreted as a loss of faith by Congress in bank regulators. At the time, it was the common wisdom that many of the nation's largest banks and a significant portion of the thrift industry would not have survived the 1980s had that provision been in force.
So how did the banking industry respond to the new standards? By 1995 the industrywide capital/assets ratio had reached just over 8% and average return on equity was a shade under 14%.
It would have taken a brave banker, in 1990, to predict that the industry could recover that well in such a relatively short while.
The lesson is clear. The banking industry has faced serious problems in the last 40 years but has been up to the challenge of putting itself back on firm and profitable footing.
So how should bankers respond to the challenges generated by today's soft economy, residue of bad real estate loans and massive new banking law?
For the near term, I suggest that, above all else, the industry mobilize to give input for the regulations that will be written. As many as 300 regulations are to be issued during the next five years. Each will be published in draft form and put out for public comment.
As a former regulator, I can assure you that thoughtful responses can have a major impact. It is important to remember that it is futile to use the regulation-writing period as an opportunity to fume about "oppressive legislation." The bill has been passed by the Congress and turned over to the regulators to enforce. State your comments in the spirit of supplying useful input.
Second, remember, in tough economic times, the bank charter and accompanying deposit insurance are still viewed as sources of strength and stability. There is no greater testament to that fact than recalling that both Goldman Sachs and Morgan Stanley chose to become bank holding companies to help them negotiate the recent crisis.
It won't be easy, but based on how we have dealt with past crises, we can have confidence in our industry's future.
