One significant repercussion of the higher capital standards for banks has been a reevaluation of the worth of growth.

There was a time when growth was everything. You would ask a banker his "footings" and he would tell you the morning's figure to the last dollar. But if you asked how much the bank earned, he would say, "Ask the accountant. He comes in in August."

Now banks have to meet much more rigorous capital standards, so growth must be backed by capital funds immediately.

Justifying Growth

This is a far cry from the days when a bank's capital position was negotiable. During those times, a bank would go as long as it could, growing nicely and keeping the regulators at bay by sweet talk or at least glib explanations of where the capital needed to back this growth would be coming from.

Among the results of this new capital standard requirement has been the recognition among bankers that each service, each branch, and each loan has to be justified as to its profitability since it will require the commitment of capital to back it.

Do we want a branch? If it does not have the potential to earn enough for us in undivided profits to justify the capital we are placing to work in establishing it, then what do we need the branch for?

If a loan will provide profits, but at a lower rate of return than the bank earns on its overall operation, then what do we need the credit expansion for? What this basically means is that banking has had to switch from being a high-volume, low markup industry to being a low-volume, high mark-up operation.

Loss Leaders by Competitors

This also gives us an answer to the old question of, "What do I do if the competition is giving, away the bank?"

This has long been the banker's dilemma.

A solid bank may feel that some service, such as checking accounts, must earn a set return to justify offering it, but the bank across the street offers the service at a far lower cost.

What do we do? Do we compete even if we know we are going to lose money on the service? Or do we let the customers move across the street?

Bankers are of two minds on this. Some feel that if we lose this unprofitable business, we will lose profitable business too, so we must offer it as a loss leader.

|Let Em' Go'

Others hold that the loss leader will never be accompanied by a "profit follower."

"Let 'em go," they say. These bankers contend that the aggressive institution soon realizes that it is losing money on each transaction and goes back to the original price level, thereby losing many of the customers back to the first bank and producing some strong ill will to boot.

And in today's market, where capital strength is so important, the number of bankers who refuse to employ a loss-leader strategy is steadily growing.

Favor Today's Shareholders

Of course, the real question is whether your bank serves today's shareholders or tomorrow's. Many bankers feel they must give up profits now to position the bank for future earnings. Others hold that today's shareholders should not be sacrificed on the altar of future profits.

And while no one can offer a definitive. answer, we do know that the new capital requirements have, in effect, forced banks to favor today's shareholders. What good are plans for future profits when the regulators want the bank to develop undivided profits and new capital today?

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