Medlin's Wise Views on Banking

John Medlin and I have for years regularly exchanged views on banking issues. Medlin, the chief executive of Wachovia Corp., gives a speech and sends me a copy with some additional thoughts, and I do likewise.

We usually agree, but not on my last American Banker column, about the credit crunch.

Sincere Disagreement

I opined in that column that the credit crunch is real and that it is regulator-driven, in part.

Medlin sent me a copy of the column with all sorts of comments scribbled on it.

He believes that banks are generally not denying credit to deserving borrowers, and that the regulators by and large are simply doing their jobs.

My purpose today is not to debate the issue further. Medlin's views, sincerely held, are based on his experiences and perspective. I have somewhat different views, based on different experiences and perspective.

Words of Wisdom

Along with his comments on my column, though, Medlin sent a copy of two speeches he recently delivered. I was so taken by his pearls of wisdom that I couldn't resist sharing some with readers of this column:

* On the challenges facing bankers: "They must clean up problems from the past and cope with increasing competition in a slower economy and a business with overcapacity; they must contain costs and become more efficient while providing quality service and investing for the future; and they must improve loan quality and interest margins in a marketplace where credit standards and risk rewards remain deficient."

* On bankers' public responsibility: "It is important to remind ourselves occasionally that banking serves a vital public-utility-like function in our economy. A banking charter gives special privileges and imposes sacred responsibilities. We must not forget that it is granted by the people who expect us to safeguard their deposits and lend them money for worthy purposes."

* On the importance of maintaining credit quality: "Banking operates on thin margins and modest capital, which afford little cushion for asset risk. ... Loan losses of 2% to 3% [can] eliminate profits and shake confidence, and chargeoffs of 6% to 7% [can] wipe out shareholder capital and cause insolvency.... Banks are supposed to be a source of strength and comfort rather than a cause of weakness and anxiety in times of stress."

"In order to serve as a profitable intermediary, a bank must be able to obtain funds at lower rates than its borrowers. Today, some borrowers can get money at cheaper rates than their banks. ... Growing rapidly often leads to trouble. Lasting progress is more likely to be achieved by expanding at a manageable pace and carefully maintaining quality standards."

* On preparing for the consolidation wave in banking: "The best strategy is to excel in the fundamentals and have a sound loan portfolio, whether you aspire to be a buyer, a seller, or remain independent.

"If you buy a bank at a premium, you should know how it can be recovered. ... If you are a seller and someone offers to pay you a substantial premium, you may be well advised to trade for cash."

* On government safety nets: "They ultimately can have painful social effects as well as expensive financial costs. As the people of Eastern Europe and the Soviet Union have learned, government-managed economies do not work as well over time as free-enterprise systems.

"A good example in the United States is the deposit insurance scheme.... It has prevented financial panic but also has permitted unsafe and insolvent institutions to develop, at great cost to the taxpayers and considerable damage to the economy.

"The system must be reformed to ... permit more market discipline. The legislative proposals being considered fall short of these needs."

* On the political system: "Sustainable improvement cannot be expected in the economy and financial system as long as politicians persist in using short-sighted and expedient remedies to get past the next election.

"A revolt by the people is needed for a turn back toward an economy and financial system driven and disciplined more by market forces. The pressures will grow as our living standard deteriorates and social crisis deepens."

These are insightful and powerful words from a wise and successful man. Bankers and politicians alike would do well to listen.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a Washington-based financial services consulting firm.

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