I recently had the opportunity to read an issue of Bankers Magazine published in 1902. The names of a few of the articles that appeared in that issue are:

"The Inertia of Congress Respecting Financial Legislation National Banks and Other Banks," "Individual Liability of the Officers of the Bank," "The Outlook of Continuing Prosperity," and "Can Panics Be Prevented?"

Sound familiar?

The similarities between today's banking industry issues and those at the beginning of the century are startling. And the history of banking crises over the last 30 years reinforces this impression.

Cyclical History

Everything seems to go in cycles, including the following areas, which have been at the root of major banking crises since the 1970s: real estate investment trusts, agriculture, energy, developing countries, highly leveraged transactions, commercial real estate, construction - and some say consumer lending may be next.

What is it that causes our industry to face the same problems we faced 90 years ago, and why do we fail to avoid problems that seem all too obvious after the fact?

The answers are not simple.

In 1902, Congress appeared to have the banking industry confused with a utility and wavered between overregulation and underregulation, prompting bankers at the time to ask: How do we deal with the inertia of Congress respecting financial legislation?

They are asking the same question in 1992.

Herd Mentality

At the same time, our industry has exhibited herd mentality many times in the past. If one institution is successful in a business, hundreds more go into it as quickly as they can. Some banks end up being caught in the trap of being last in and last out - and not just in the United States.

When Japanese equity warrants became hot in Europe, hundreds and hundreds of dealerships were opened by the best and the brightest, only to be closed and to incur major losses as the Japanese equity markets crashed. Gilt trading and European commercial paper trading are other examples of the herd syndrome abroad.

Having observed such recurring crises and noting the topics of the 1902 Bankers Magazine lead me to suggest a fundamental change is required in the way we think about our industry.


Are banks and thrifts shortsighted, like the railroads that thought they were in the railroad business and not in the transportation business?

We all talk about being in financial services, although some of us seem to act as if we were in the more narrowly defined banking business - our railroads.

Bankers talk about change and anticipate it; they even accept change. But they don't seem to be able to bring it about. Instead, they react to it. So the same crises and the same questions arise today as 90 years ago.

It is time the industry broke out of its mold and did things differently. It is time to close ranks and deal with Congress in a way that moves it in our direction, rather than reacting to it.

It is time for depository institutions to understand all the implications of being in the financial services business and stake out defensible strategic positions.

The Success Stories

Some leaders, such as J.P. Morgan, Bankers Trust, Northern Trust, State Street, and many superregional or super community banks already have carved clearly defined niches. Their strategic commitments are applauded by analysts and investors in the form of rising stock prices.

These successful companies are not as susceptible to, or hurt by, the faddish lending programs that caught up with many members of the banking community. The leading companies' clear strategic positions counter-mand the herd syndrome and the last-in, last-out trap.

They have the courage to say no to certain businesses and to focus resources on a few well-diversified elements.

As we view consumer lending we should bear that in mind: The specialists will succeed in consumer lending simply because they're specialists. The business may not be right for everyone.

The industry as a whole, through its associations, should consider how to avoid the next real estate investment trust, the next agriculture loan crisis, and the next LDC debacle. We should ask ourselves how to prevent an article in years hence about failure to enact appropriate financial legislation.

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