As L. William Seidman sees it, banks have one big advantage in the mutual fund business. "They have the customers," he says.
But, he says, banks still face formidable competition in the field and are handicapped by regulations.
The former chairman of the Federal Deposit Insurance Corp. offered this mixed appraisal in New York during during a bank mutual fund conference sponsored by the American Banker.
Praises Bank Efforts
Mr. Seidman lauded the efforts of banks to get into the mutual fund business, noting that the industry is losing ground in the traditional businesses of taking deposits and making loans.
"I think the banking industry is going downhill as fast as its profits are going uphill," Mr. Seidman said.
Mutual funds can help strengthen banks, he added. "They are a way for banks to fight the battle to keep customers," he said.
And, in providing mutual funds, banks can make clear use of their prowess in risk evaluation.
"Customers look to banks as experts in which funds to invest in," Mr. Seidman said
But the fund business is by no means easy.
The leading mutual fund companies offer full ranges of products and enjoy substantial economies of scale, he pointed out. The five largest fund companies account for more than 30% of the industry's assets, he said.
At the same time, price cutting is on the rise and the business is becoming more capital-intensive. For example, he said, fund sponsors need significant capital to pay brokers' commissions on the increasingly popular "back-end load" funds.
For a bank, these are pretty awesome challenges," he said. Banks also must contend with interstate banking prohibitions and other restrictions.
"The successful mutual funds are national institutions," he said. "Banks as regionals will be very much handicapped."
Then there's the Glass Steagall Act, which prohibits banks from underwriting mutual funds. This is another "archaic" law that hobbles banks, Mr. Seidman said.
The fate of interstate banking rules and Glass-Steagall "will ultimately impact the future of mutual funds at banks," Mr. Seidman said: