Some people just can't be convinced.

The economy is humming, the stock market at rarefied heights. Bank failures and thrift crises are distant memories, and the banking industry is about to set its fifth straight record for annual income, exceeding $50 billion for the first time.

Yet 16% of the public considers the banking and financial system unhealthy.

"You wonder what the hell people are thinking," Treasury Under Secretary John D. Hawke Jr. said when apprised of this result from the 1996 American Banker Consumer Survey.

In fact, 16% is a record low for the 13 years the survey has been conducted. It is down from 19% last year. And only a quarter of the 16% deemed the financial infrastructure "very unhealthy." Perhaps these people can be written off as perennial malcontents.

"Even if you asked about God and apple pie, you would have people who wouldn't like either one," said Walter A. Dods Jr., chairman and chief executive officer of First Hawaiian Inc. and president of the American Bankers Association.

But one out of six being a nonbeliever may be a little much. By comparison, only about one out of 20 customers are consistently dissatisfied with the services they receive from banks.

The number of financial consumers - people with at least one type of asset or liability account - rating the system "very" or "fairly" healthy amounted to 78%. This has never been higher, as was the 18% saying "very healthy." However, each of these statistics rose only one point from last year, which is within the three-point margin of error.

People who are older, have higher incomes, or live in the South were more likely than average to rate the banking and financial system "very healthy."

The "health index" hit bottom in 1991 and 1992, when 51% rated the financial system very or fairly healthy. The number climbed quickly and hit 77% the last two years.

"The trust that consumers put in them is one of banks' greatest legacy assets," said Thomas K. Brown, senior vice president at Donaldson, Lufkin & Jenrette Securities Corp. in New York. "But I hope bankers do not become too deluded by the record profits that they're reporting this year."

"This is probably as good as it gets for banking," said Charles Wendel, a New York-based consultant who recently compiled a book of interviews with some of the financial industry's most prominent CEOs. "There is no sense of crisis, but things could change over the next couple of years."

Mr. Brown fears banks are not keeping pace with the changes. "The franchise of most banking companies is still truly at risk," he said.

"I agree with that," said Mr. Dods. "We need to continue to redefine our role" and push for new products and services.

"I don't think banks ought to be lulled into a false sense of security just because the public views them as healthy," said Comptroller of the Currency Eugene A. Ludwig. "Banks have got to continue to run to stay in place."

As for those wary 16%, "If they haven't come around by now they probably are never going to come around," said John Tamberlane, president of Republic New York Corp.'s consumer bank. "They are the pessimistic element of the population that's waiting for the market to crash or the banking industry to stumble."

Mr. Hawke noted, "In a downturn, this sort of negativism has the potential to cause problems for banks." And Mr. Tamberlane said the industry's stable image is especially critical as it tries to broaden its services to include brokerage and insurance.

"Banks have to convince the population that they can do those other things," Mr. Tamberlane said. "Now a customer says, 'I go to a bank for this and I go to a brokerage for that and for insurance I go over there.' Just the fact that we can offer it doesn't mean that the customer has confidence in us dealing with that product."

L. William Seidman, former chairman of the Federal Deposit Insurance Corp., offered another perspective: "If you just look at the numbers themselves, everyone should say the system is healthy, 100%. Anybody can look good on a sunny day. The question is how do you look when it's sleeting and raining?"

The real test of public confidence, said Mr. Seidman, will come during the next wave of soured credits.

"While people think banks are getting healthier, they still have some grave doubts about whether they can manage risk in a downturn," he said. "The stock market doesn't think they can."

For the 13th annual American Banker poll, conducted in September and early October, the Gallup Organization asked a related question about confidence "in the safety and security of the U.S. banking and financial system.

Of the 1,031 heads of household responding, 30% said they had a "great deal" of confidence, unchanged from 1995. The number with "some" confidence fell a marginal 2 percentage points, to 54%.

Every year since 1985 when this question was added, more consumers expressed some degree of confidence than said the financial system is healthy. But the gap between the total confidence and total health scores, as wide as 28 percentage points in 1987, has shrunk to 7.

"It shows considerable intelligence on the part of the people that they think the health and the safety of the industry are not necessarily correlated," said Mr. Seidman. "The system is safe because of deposit insurance - and that's true for even unhealthy banks."

"The health rating is coming up to the safety rating," as Mr. Seidman interpreted it.

Still, both the health and safety trends have lagged a broader measure of consumer confidence, the widely followed Conference Board index. All have moved generally in parallel - up in recent years - but the Conference Board index's recent rise to a cyclical peak makes the American Banker/Gallup readings appear to have plateaued.

Robert E. Litan, director of economic studies at the Brookings Institution, wondered whether confidence measures matter.

"Despite all this confidence, banks are continuing to lose market share to mutual funds," he said. "Consumers can believe they are perfectly safe (using banks), but safety is not the driving consideration."

Return on their money is.

"People put all their marginal money in the stock market," Mr. Litan said.

Mr. Tamberlane at Republic agreed, but said confidence may not be what it used to be.

"It's not the selling tool that it was when banks were failing and there was a article in the paper every day about the (insolvent deposit insurance) fund," the New York banker said.

In the early 1990s when other banks were reeling, Republic's high credit rating gave it a competitive edge, he added. "When there was a confidence issue, we used our credit rating to help develop business."

What might threaten to end the party?

"It's conceivable that a cyber-nightmare is out there waiting to kill the banks," Mr. Litan said. "But that's totally speculative."

Mr. Hawke at Treasury pointed to "more mundane things like being held up at an ATM."

The perception of the public could suffer if banks react to the increase in loan delinquencies by tightening credit, said William E. MacDonald 3d, chairman, president, and CEO of National City Bank in Cleveland. "If we do get into a credit crunch, I'm sure there will be a falloff."

Another common concern is consolidation, which Mr. Tamberlane said can mean higher prices and less convenience for consumers.

"More and more locally owned banks are being taken over, so that sense of community identity is weakening," Mr. Hawke added.

Next: Rethinking IRAs

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