Here is a conversation I had with a member of the asset-liability committee of a major bank.
BANKER: What should we do? Loan demand is not strong, and we need earnings. Shouldn't we go out longer than fed funds and buy some two- or three-year paper to put our deposits to work profitably?
P.N.: How much added yield are we talking about?
BANKER: About 50 to 60 basis points.
P.N.: Is it worth it? How much of a further rise in interest rates would it take to depress these two- and three-year notes by 50 to 60 basis points?
BANKER: Not much. But our economist says that the next move in interest rates is likely to be downward. So we can make a good capital gain, too.
P.N.: How right have economists been about interest rates? Besides, do you really want to gamble on rates. Isn't that what got the thrifts and so many banks into trouble before?
BANKER: But rates are pretty high. How much higher can they get?
P.N.: Who could have predicted a 21.5% prime? Haven't all of us gotten into trouble buying stocks because they dropped from, say, 100 to 50, at which time we thought they were a bargain, only to see them drop 18%? Interest rates also provide me insurance that what we have seen in the past we will have to see again.
BANKER: O.K. If you say we should match asset and liability maturities and not play the yield curve, then how can we make any money on our deposits?
P.N.: Why not cut the rate you pay on deposits if you don't need the money?
BANKER: You're depressing. How can we make money for our bank?
P.N.: It may be tough, but it's possible.
You can make money by selling noncredit services, by selling your stature through providing guarantees on direct borrowings of your clients for a fee, and by finding ways to sell your talent in finance.
When I look at how much more financial acumen the local bank has than anyone else in town, I think of President Kennedy's introduction of several famous musicians at a White House concert: "Tonight we have almost as much talent in the White House as we used to have when President Thomas Jefferson ate breakfast alone."
BANKER: You haven't been very optimistic tonight.
P.N.: In today's environment, return of capital means more than return on capital.
Should you bet the bank for a small additional return?
Too many banks and thrifts went down the drain for that extra 60 basis points, which later became 100 and 200 basis points as liquidity and quality were sacrificed for yield.
Borrowing short and lending long remain as much of a siren's song as ever.
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Banks find that one drawback with ATM machines is that people no longer have to come into the lobby and see human tellers who can cross-sell the bank's services.
Why not have an ad over the ATM machine that tells the latest in services that are available or that promotes one service every month? If accompanied by a local phone number and name to call, this could help solve the problem.
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In the same way that airlines and hotels have frequent-flier programs that reward people who are loyal to that institution, why can't banks have programs to reward those who have been loyal for a number of years?
This club might get slightly lower rates on loans or reduced service charges. In some instances, mention of those who have been loyal to the bank for a certain number of years and have entered the five-year or 10- year club can further cement relations with the bank, just as some credit cards show years of membership.
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Banks frequently wonder what to say in their newspaper ads to differentiate themselves from other institutions.
A column each week or so about a different employee and what he or she does could help personify the bank, indicate its strengths, and build community loyalty, especially among people who know the individual featured.
