THE BANKING industry's good news -- low interest rates, impressive spreads, declining loan losses, and rising profits -- has spread to consumers, increasing their confidence in banks.

For the first time in five years, banks appear healthier in the public's eyes, according to the American Banker's annual consumer survey.

The confidence level actually stabilized a year ago, when 5 1 % of the respondents to the American Banker/Gallup Organization poll rated the industry either somewhat or very healthy. That number was identical to the finding in 1991.

This year. the "healthy" figure was up by 13 percentage points, to 64%. Meanwhile, the percentage calling the industry unhealthy declined from 46% in 1991 -- the highest in the 10 years of the American Banker survey -- to 43% last year and 34% in 1993.

The uptick in confidence may reflect nothing more than a careful reading of the daily papers.

"We've had seven or eight quarters now of record profits, and that's a piece of information that contrasts sharply with the headlines of the late 1980s," said Chris Lewis, a banking lobbyist for the Consumer Federation of America.

But Mr. Lewis thinks the legislative climate could also be having an impact.

The ups and downs in confidence readings have coincided with congressional consideration of two high-profile pieces of legislation.

Consumers' worries about the banking system heightened in 1989, the year of the savings and loan bailout legislation. As Congress grappled with the Bush administration proposals, the thrift industry's woes became front-page news. Estimates of the cost of the bailout seemed to rise without bounds, tens of billions of dollars at a shot.

The survey ratings bottomed out in 1991, the year in which Congress approved a rescue package for the Bank Insurance Fund. In addition to making a $30 billion credit line available to the Federal Deposit Insurance Corp., the law imposed a number of new safety and soundness standards on financial institutions.

"That's an indication that if bankers succeed in rolling back [the 1991 regulatory changes], there could be a price to pay in terms of consumer confidence," said Mr. Lewis.

Nonsense, responded John Russell, chief communications officer for Banc one Corp., Columbus, Ohio.

"I don't think the public in general understands that," he said, referring to the 1991 law's focus on safety and soundness. "People don't concentrate on that. They concentrate on where they are going to spend their next paycheck."

The more likely explanation, Mr. Russell said, is simply the change in tone in newspaper headlines.

"It's the record profits," he said when told of the 1993 recovery.

Consumers do appear to be paying attention to the rising fortunes of the banking industry and making a distinction between the health of banks and the health of the rest of the economy.

For example, the Conference Board Index of general consumer confidence in the economy has moved in the opposite direction of American Banker's ratings at several key points.

In comparing the two, data for May were used -- to coincide with the month of the newspaper's poll. The Conference Board index jumped sharply upward in 1988, at precisely the time in which confidence in banks began dropping. And beginning in 1991, when the banking industry's scores bottomed out and then began rising, the Conference Board index showed a sharp, three-year descent.

Whatever the reason, the rising tide of confidence in banks bodes well for the industry.

"Consumers have to trust banks," said Joe Belew, president of the Consumer Bankers Association. "That's just a basic underpinning of our business."

"Clearly the concern about the health of the system is important when people think about where to put their money," added Robert D. Hunter, executive vice president for consumer financial services at Chase Manhattan Corp.

Consumer activity at Chase has been picking up in recent months, Mr. Hunter said. One likely reason is the reversal of the public relations beating banks were taking as recently as two years ago.

"Given a choice -- and all consumers have choices these days -- people are not inclined to go to institutions that have a bad reputation," he said. TWo years ago, "we were in an environment where banks were getting bashed."

Sung Won Sohn, chief economist at Norwest Corp., Minneapolis, said the renewed optimism about the banking system couldn't have come at a better time. The rise in confidence should bring consumers back to banks both as depositors and borrowers, he said.

"An important job for the future will be attracting core deposits back to the bank," he said. "Interest rates will be trending up and core deposits are worth more when interest rates are high."

Even though deposit insurance means most consumers will never have a nickel at risk in a bank, "people don't want the disruptions associated with bank failures," Mr. Belew added.

A few years ago, Mr. Belew noted, Consumer Bankers Association members reported that they were getting a number of inquiries in their lobbies concerning the institutions' health.

"We had a discussion at our board meeting about it a couple of years ago," he said. "People were having to train tellers how to respond."

Such questions are no longer coming up, he said.

Returns on government bonds are dropping. Mr. Sohn said, a trend that will force banks to seek more loans.

"The yield curve is flattening and there aren't as many opportunities to invest in government securities," he said. "So banks will have to rely more on higher-yielding consumer loans."

In addition, consumers are more likely to go to banks for nontraditional products like mutual funds when confidence is up, said Mr. Hunter.

"A lot of people who buy mutual funds in bank branches are just disintermediating deposits" -- pulling money out of a saving account and socking it away in a higher-yielding investment.

"But the real investors -- those that shop around -- are certainly affected by their sense of how healthy banks are," Mr. Hunter said.

In the American Banker survey, the Gallup Organization asked two kinds of questions intended to elicit feelings of consumers about the shape of the banking industry.

One asked, "How healthy do you think the U.S. banking and financial system is at the present time." That resulted in the 64% healthy-34% unhealthy split, with 2% unsure.

The other question was, "How much confidence do you personally have in the safety and security of the U.S. banking and financial system today."

The percentage expressing "some" or a "great deal" of confidence totaled 82% this year, and has been consistently higher than on the health question, though both have usually moved in the same direction over the years.

Within the sample, however, there were significant varations in responses among consumers in different regions of the country and among individuals of varying social and economic status.

Northeasterners, for example, were far more pessimistic than the country as a whole, with only 56% describing the system as either very or fairly healthy.

Optimism in the north central states was greater: 69% said the industry was healthy. Southerners were only a little less upbeat at 66%, and westerners followed at 61%.

On the confidence question, the Northeast was five points below average, at 77%. Each of the other three regions was between 82% and 83%.

Age also appeared to be a factor, with older Americans generally more optimistic than younger people. Among those 25 to 34, only 60% said the system was healthy. That number rose to 62% among those 35 to 44, 64% for those 45 to 54, and 69% for those 55 to 64. The exceptions were at either extreme. Among those in the youngest segment, age 18 to 24, 65% said the system is heal -- a percentage topped only by the 55 to 64 group.

And among those 65 and older, 64% saw the system as healthy, putting them on a par with the 45 to 54 group and the population as a whole. But on the second question, only 78% of the oldest segment expressed some degree of confidence, while every other age group was above 80%.

This was the first year since 1988 when a rise in "banking confidence" coincided with an increase in customer satisfaction. As reported on page 7A, 61% of respondents were "very satisfied" with their principal financial institution, up from 59% in 1992.

It has been more common for the measures to fall together, as they did in 1986 and 1989, or move in opposite directions, as in 1987 and 1991.

When the customer satisfaction level held steady in 1990, at 61%, those rating the overall system healthy fell to 62% from 65%. And when the "healthy" group held steady in 1992 at its 10-year low of 51%, the "very satisfied" customer group declined by seven percentage points, to 59%.

Bankers and their market researchers have never established a link between the "macro" and the "micro," and therefore concentrate on the latter in hopes of maximizing their customers' satisfaction.

"When there may not be a whole lot of confidence in the system, it is at their [consumers'] own institutions that the chips come due," said Michael Sullivan, a marketing consultant in Charlotte, N.C.

Some bankers talk a lot about consumer confidence rubbing off on service satisfaction or vice versa, but they aren't preoccupied with it, Mr. Sullivan said.

"There is a bit of arrogance in that," he added. "It's kind of like the bank stock market. When prices are up, they want to take credit, but when they are down, it's the whole industry that is at fault."

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