Tuesday, April 10, 2012

Why Do I Need a Commercial Bank?

There is really no reason for me to be a customer of a commercial bank. 

Full disclosure: I am not the customer of a commercial bank. 

There is really little or no reason for many people…and businesses…and non-for-profit organizations…to be a customer of a commercial bank.

Here again, however, we are getting a bifurcation of the society. 

The world is splitting into those people, people with even a modest amount of wealth and some financial sophistication, who do not really need a bank and other people, who need only the very basic products and services offered by some kind of a banking organization.  And, in the latter case, a credit union is often the best place they could go to get the kind of products and services that they need.

Pushing this split along is…of course…the regulators. 

Allan Meltzer, in his delightful little book “Why Capitalism?”(Oxford University Press: 2012)   presents his two laws of regulation.  His first law of regulation: “Lawyers and bureaucrats regulate. Markets circumvent regulation.  His second law of regulation: “Regulations are static.  Markets are dynamic.  If circumvention does not occur at first it will occur later.”  The regulators, in their attempt to prevent a recurrence of 2008, are pushing the financial system well beyond what it once was.

Furthermore, advances in information technology are making circumvention easier and easier every day.  If finance is just information…which it is…and information can be presented in any form that can be useful, then financial information can be “sliced and diced” in any way that can serve the needs of a person or an organization.  And, it can be done almost instantenously.  This certainly will contribute to the ability of financial institutions to “circumvent regulation”.

The Financial Times devotes two pages in its April 10, 2012 issue to “shadow banking.”  To include the scope of this area, the Financial Times lists “alternative forms of finance.”  These alternative forms include leveraged finance, broker-dealers, hedge funds, money market funds, insurers, blue-chip lenders, mortgage servicing, peer-to-peer lenders, and governments. 

The paper even has a case study of what Siemens is doing to protect its money and to provide credit to suppliers as well as customers.  And, Siemens operation has been expanding over the past five years, rather than shrinking like many other “banking” organizations and now has a presence in such emerging markets as China, India, and Russia. 

Even Vikram Pandit, the chief executive officer of Citigroup, a form hedge fund manager, has stated that “One of the many unintended consequences of the brutal regulatory crackdown on banks is that there is now a massive incentive to be a shadow bank.”

But, there has also been a massive shift in terms of what is available to individuals and families on the financial front.  If you would have told be a few years ago that I would have no need of a commercial bank I would have said that you were delusional.  Now, as I said above, I do not do my “banking business” with a commercial bank. 

And, the situation is becoming even more desperate for the commercial banking industry.  The American Bankers Association is frantically fighting legislative bill S. 2231 which contains legislation that would allow credit unions to more than double the amount of business loans they could keep on their books.  The ABA argues that a vote for this legislation is a “vote against your community banks.”  ABA material goes on to say that “This special-interest bill allows aggressive credit unions to leverage their tax advantage to steal loans from community banks.”

It could be noted that credit unions are not taxed because they are mutual organizations…like mutual savings banks and savings and loan associations before them…but also have a lower cost structure that adds to their ability to attract business. 

The financial industry is changing and is changing dramatically.  Technology is speeding this change along, but so is regulation.  It is obvious that the press is now very aware of the innovations that are taking place.  More and more we see articles on mobile banking, new financial instruments being formed, products and services being offered in a different way, and global organizations penetrating more and more into regional and local banking markets. 

More and more people I talk with do not keep their business at a commercial bank any more.  Most of the young people (in their teens) I know are so sophisticated technologically that it is ridiculous to think that they will have anything to do with commercial banks.  And, if that is true, what will the case be for their brothers and sisters that are only five, let alone ten, years younger than they are?

The American Bankers Association admits that “Community banks account for a little more than 10 percent of the banking assets in our country….”  I cannot envision a scenario in which this percentage will increase…even if the credit union legislation mentioned above is defeated. 

In fact, I cannot envision a scenario in which the larger financial organizations do not become more and more like “shadow banks” rather than commercial banks.  Global competition will demand it.      

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