Executive Summary: The banking industry has allowed itself to be painted very negatively as struggling to survive, uncaring of its customers, and, oftentimes, more focused on self-dealing than on its shareholders. Reality needs to replace these smears if the industry is to regain a position of trust and loyalty with its customers.
How has the industry found itself in its current position, one in which it is increasingly vilified by the government and customers? Why are all banks being lumped together in discussions of the need for nationalization or other radical steps? Why are the facts related to the critical role played by regional and community banks in supporting commercial customers largely unappreciated and unknown by major stakeholders?
Why is the industry allowing itself to be treated like a piñata at a young boy’s birthday party?
* The industry has let itself be defined rather than defining itself. With few exceptions, in particular Wells Fargo, the industry has allowed itself to be beaten up by Congress and the media. It has been sheepish in communicating how it has been supporting the needs of the consumer and businesses. Some of the Congressional hearings have been downright embarrassing as bankers grovel in front of often misinformed and venial legislators.
* Regional and community banks have allowed investment banks and the largest commercial banks to take the lead in representing the industry. Typically, investment bankers and commercial bankers (specifically regional and community bankers) are very different species but much of the public does not understand that. John Allison, recently retired Chairman of BB&T, has been very out front (but also largely alone) in promoting this view. Late last year, he was quoted as saying that the U.S. Treasury is “totally dominated by Wall Street investment bankers,” and “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries.” Allison also said it is “inappropriate that the debate is largely being shaped by the financial institutions who [sic] made very poor decisions.” The very largest banks are representing the needs of 8,000 banks, most of which are mid-sized or small. The interests of these two groups increasingly diverge.
Most commercial bankers are not paid like investment bankers (at least investment bankers pre-2009). Nor do they approach their clients with the same type of deal mentality. Without exception, unlike many investment bankers, the commercial bankers we have worked with try to do the right thing for their customers. Unfortunately, a decreasing number of their customers believe that to be the case. Smaller banks have allowed themselves to be lumped in with the very biggest players.
No less a source than Donald Trump proclaims the competence and importance of banks beyond the largest. In Sunday’s New York Times, the Donald commented: “Many of the best bankers are in the midsize-and-smaller banks and, frankly, those are the banksthat aren’t in trouble. They didn’t do the ridiculous transactions.” That is the basic message that needs to be communicated by 8,000 banks.
* A relative handful of banks are responsible for the industry’s poor performance in 2008 and beyond. For example, the three largest banks generated over 40 percent of 2008 charge-offs and a similar percentage of delinquencies; not surprisingly, they also received more than 50 percent of total TARP funds.
Of course, to some degree all banks are suffering in the present environment: in some cases long-time customers have been experiencing problems, resulting in higher delinquencies and losses; many hold Trust Preferred Securities that have eroded capital at fundamentally well-performing banks; others see limited near-term growth opportunities due to funding/capital constraints. Nonetheless, these 7,000+banks are fundamentally sound and will survive the present downturn. But, do most Americans know this? How could they when doomsayers like Nouriel Roubini constantly appear in the media with apocalyptic forecasts for the industry?
The fact is that most banks are doing what is necessary for them to get through the present crisis, including continuing to support their customers. FIC’s analysis of year-end data for FDIC- insured banks shows that regional and community banks have stepped up their commercial lending to replace decreased loan activity by the largest banks.
* Many in the industry have no long-term plan. I wrote about this topic in our last Newsletter, but the point was underscored by a comment made to me in the past week. A colleague recounted a meeting with a bank exec that was centered on some growth opportunities. The exec’s reaction: “I hear you about growth, but right now it’s all about not losing money.”
Banks may not want or be able to grow immediately, but they need to ensure that they know where they want to head once the fog clears and that they have the processes, policies, and people in place to make it happen. Few are thinking about this. Instead, they are trying to avoid being hit by the piñata bat.
Concluding Thought
A lot of very fine institutions are being tarred with a brush they do not deserve. We know many banks that are actively pursuing new business opportunities and are taking share from the weak and infirm. However, those banks that are performing well need to communicate both the depth of their financial strength and the degree to which they support customers. The implications of not doing so may include increased government interference, decreased customer loyalty, and greater share loss to non-banks.