The performance of depository institutions will continue to improve in 1994. As the remnants of the problems of the 1980s are finally being resolved, the banking industry can focus on the future rather than the past.

The solid earnings of 1992 and 1993 that are likely to continue into 1994 have given the entire banking industry, and particularly its thrift segment, a window of opportunity to capitalize on favorable marketplace trends. This outlook often had to be set aside while restoring the capital base was the top priority for many institutions.

The most basic trend to be recognized is the ongoing integration of thrifts into the banking business. Rationalization of branch networks and the consolidation of institutions is now proceeding without any regard to traditional boundaries between depositories.


In many ways, the thrift industry, with its new orientation to specialization determined by management expertise and market demands, has run ahead of the banking business. For example, nationwide branching and acquisitions are fortunately no longer contentious issues within the thrift industry.

Management has adapted to the new competitive realities and has survived a rigorous Darwinian selection process as the industry has downsized. In gross numbers, more commercial bank consolidation will occur by the end of this decade, though thrift consolidation (both thrifts acquiring thrifts and bank acquisitions of thrifts) will also definitely continue.

No institution can isolate itself from the capital market and the competitive influences that produce these trends.

Market Access

A real problem in the RTC/SAIF funding debate was the difficulty of convincing the Congress that access to the capital markets depends on the preservation and enhancement of thrift franchise values. Since the financial services market is now so competitive, any differential burdens on one class of depositories will inevitably be capitalized, and offset their stock market value.

The recovery of market-to-book and price-to-earnings ratios since the 1980s shows the greater faith that investors now have in the market position, core earnings and interest rate risk hedging of thrifts.

Demonstration of reliable marketplace strength will support the share price of the institution or its conversion value if the entity is still in mutual form. This is a vital concern whether the institution is interested in acquiring, being acquired, or simply being left alone.


Though thrift institutions are now solidly integrated into the overall banking community as institutions focusing on retail and real estate finance, the competitive position of depository institutions is far from secure.

A shrinking fraction of financial intermediation is flowing through depositories' balance sheets as direct relationships with the capital markets and mutual funds service a continually growing share of corporate and consumer needs. The substantial and uneven regulatory burdens that accompany federal deposit insurance have reinforced the pre-existing tendency for retail customers to stretch for yield by moving to equities and mutual funds at a low point in the interest rate cycle.

Though many suggestions, both evolutionary and radical, have been made for the regulatory problem, the thrift charter already offers broader insurance and financial services powers than are available to commercial bank holding companies where insurance powers still remain subject to litigation and legislative challenges. This charter flexibility gives dynamic thrifts a head start in seeking to broaden their franchise, serve their customers, and create stockholder value.

Fine Tuning

Ultimately, the marketplace will drive the process, but the customer service orientation for institutions attuned to these needs will be a far more reliable guarantor of viability than the charter limitations that are under constant threat and of questionable long-run efficacy.

At some point, Congress will be forced to address the outmoded character of the rules governing depositories if the ability of the banking system, broadly defined, to support the needs of the U.S. economy, is to be sustained. The thrift industry has already experienced the difficulties of dealing with the lack of synchronization of marketplace and supervisory realities. The thrift industry will be a major beneficiary of the realization that these marketplace trends will continue and that the managers of these institutions are adept participants in this dynamic process.

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