The dollar's slide should come as no surprise. For years we have been operating with record budget and balance of payments deficits and counting on foreigners to finance them by buying American securities.
Now overseas holders of our debt are wary about the future of the dollar. Many have been turning to euro-denominated securities instead. As a result, the dollar has fallen from 80 cents per euro at the beginning of the century to $1.34, and some economists have predicted that the euro will be as high as $1.60 by 2008.
Anyone who has traveled to Europe recently and has had to pay for food and lodging knows how much less the dollar buys. But what does its decline mean for community banks?
Far less, of course, than for money-center banks that trade in foreign currencies all the time. But still, there are important implications that should affect community banks' service offerings, their evaluation of the prospects of their borrowing customers, and maybe their own future as independent organizations.
Look first at services offered. A number of Americans have been wondering how they can protect their savings from the shrinking dollar. It is certainly feasible for community banks to offer euro-denominated savings accounts, whose proceeds the local banks would reinvest in euro deposits with their own foreign correspondents. Community banks could provide this service with a moderate commission and no risk of loss from currency changes.
How could the dollar's slide change the profit potential and thus the creditworthiness of borrowing customers? Those whose prospects depend on Americans buying or traveling abroad should worry. Travel agents and specialty importers in particular may well be hurt.
Conversely, banks whose borrowers are exporters should take heart in the fact that a cheaper dollar means more opportunities to sell abroad. (Unfortunately this does not help when the competition is from Japan and China, which have tied their currencies more closely to the dollar to avoid losing market share back to American manufacturers. They are more interested in protecting producers than in giving their own consumers a better deal; as a result we still see people from Japan, for example, finding Japanese appliances cheaper in New York than in Tokyo.)
But there are two stronger reasons for community banks to worry about the declining dollar.
First, it raises import costs, fueling inflation. This in turn will lead to higher interest rates and end the era of community banks profiting from their captive low-cost deposits. Additionally, homeowners with variable-rate mortgages may find it harder to manage their obligations. Any bank that has not been planning for the effects of higher rates on its asset/liability gap could be in for an unpleasant surprise.
Finally, some bank analysts are beginning to think the high-flying euro is making the idea of buying American community banks more attractive to European investors.
This makes sense. They couldn't buy control of any major U.S. banking organization, but community banks and smaller regionals might be targets - and these could be used as bases for further inroads into the American financial market.
The industry may pay this price for our nation's dependence on foreigners to finance our deficits, our private savings shortfalls, and our import-addicted standard of living.
Mr. Nadler, an American Banker contributing editor, is a professor emeritus of finance at Rutgers University Graduate School of Management in Newark, N.J.
