Risks Associated with Investing in Commercial Banks

If I thought I was a “value investor” and that my investments should be held, at a minimum, for four or five years, I would not want to put any of my investment money in commercial banks at this time.

The primary reason for this is the uncertainty that envelops the banking industry at this time.

First, there is still, I believe, a great deal of uncertainty about the value of many of the assets banks are carrying on their balance sheets.  Let me just mention three areas of concern: commercial real estate loans; residential real estate loans; and anything connected with state and local governments. 

Commercial real estate loans have generally been granted with a five to seven year maturity with the principal of the loan coming due when the loan matures.  Many of these loans are coming due or will come due in the next 12 to 18 months.  Most of these loans will need to be refinanced.  A large number of the projects connected with these loans are not doing well.  It is uncertain what will happen here.

Current statistics on residential real estate loans indicate that about one in four of these loans have a mortgage value that is in excess of the market value of the underlying property.  The government would like to see many of these loans refinanced with the principle amount of the loan being reduced to a value below current market values.  This may help the borrower but it would require substantial asset write-downs for the financial institution holding them.

In terms of state and local governments very little needs to be said these days.  Every week it seems we learn more about the financial tricks these governments used and the unfunded pensions that exist, which cannot easily be covered.  No one seems to have an idea about how much these problems will impact our commercial banks.

Second, there is the uncertainty hanging over the banking system about the new rules system that is going to be imposed.  President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010.  That was two years ago!

And, banks still don’t know what some of the laws are and how they will be implemented.  One reason for this is that there are still a number of the provisions of the law that have not been fully written yet.  Dates still get postponed for when various provisions will actually be implemented.

Then we have the Basel III rules, imposed by international agreement, that remain to be implemented. 

I don’t know one banker that is happy with this situation. 

Third, there is the uncertainty with respect to the state of the economy.  Very little is happening in the economy.  Economic growth, year-over-year, remains around 2 percent and is not expected to get better in the near future.  The reports are growing about companies that are cutting back spending because of the uncertainty created by the “fiscal cliff” coming up. And, there is uncertainty about how the economic crisis in Europe is going to play out in America.

Finally, there is the uncertainty surrounding the future structure of the banking system.  Although there has been so much noise about banks that are “too big to fail”, the larger banks continue to dominate the banking scene and will continue to do so in the future. 

The largest 25 banks in the United States plus foreign-related financial institutions hold more than 70 percent of the banking assets in the country.  This number is only going to increase. 

Domestically chartered banks that are larger than $1 billion in asset size (there are 525 of them) hold more than 90 percent of the assets held by domestically chartered banks.  This means that there are about 5,700 banks in the United States that hold less than 10 percent of the banking assets in the country.

And, we hear and read about the pressure that the bad bank assets, the poor economic conditions, and the growing regulatory burden are putting on the smaller banks.  Take for example the Wall Street Journal article, "Small Banks Are Blunt In Dislike of New Rules".  This is an article about how these bankers are reacting to the proposed rules on capital levels related to Basel III. 

The most important, to me, paragraph in the whole piece is the last one.  “C. R. “Rusty” Cloutier, president and CEO of MidSouth Bancorp, Inc., of Lafayette, La., said the Basel rules won’t affect him as harshly as some smaller banks since he is on the big end of small—about $1.5 billion in assets—and publicly traded.  But his phone is ‘ringing off the hook’ for smaller lenders looking for an exit.” 

Everything today points to larger banks and fewer smaller banks.  And, it is not just the economics that is pointing this way but the actions of the politicians and regulators are also driving things in this direction as well.

But, there are two other major players that have to be contended with in the restructuring going on:  credit unions and “shadow” banks. The roles these two categories of financial organizations are going to play in the new structure are uncertain now, but they will be important players, I am sure of it.

For one, people needing “banking services” are going to divide into two sub-groups.  Those that don’t need “traditional” banks…like myself…who can do all they need electronically and interact with all their assets within the same institution.  And, those that basically only need a checking account, a safe deposit box, and maybe a savings account.  This latter group needs a “no frills”, low cost provider of basic banking services.  The credit unions may eventually satisfy this need. 

And, lending is going to change for small business.  Angel financing is going to grow.  Private equity is going to play more of a role in business lending and then there are other innovations like “peer-to-peer” lending and so forth.  No telling what is going to evolve from the Internet.  No telling what will come from the shadow banking system.  Depository institutions need not apply.

In five years, banking finance will be structured in a very different way.  Getting there will be the problem.  Because of the uncertainties mentioned above, investing in commercial banks will make it very difficult to pick winners.

At the start of the year, who would have picked out JPMorgan Chase as the institution that would “shock” the banking industry with trading losses?  Myself, I am not confident that any bank in the present environment is immune from such surprises.  Banks may have bad assets on their books that have not been recognized.  Banks may be unprepared for exactly how the banking regulations are going to work out.  Banks may not whether this period of slow economic growth well.  And, banks may not be fully prepared for the changes taking place in information technology and the new competition from shadow banking and beyond. 

These are new times.  There will be new “winners.”  And, there will be lots of losers.  Welcome to banking in the early twenty-first century!

The Banking System Through the First Half of 2012

Total reserves in the banking system have actually dropped from June 2011 to June 2012 by about 6.6 percent or about $110 billion.  These are according to the latest figures released by the Federal Reserve.

Yet, required reserves in the banking system have increased by a little over $21 billion during this time period representing a rise of almost 28 percent.

The reason why these numbers are moving in opposite direction is that individuals and businesses are continuing to move their assets from short-term interest bearing instruments into currency or into transaction accounts at financial institutions.

Coin and currency in the hands of the public rose by 8.5 percent, from June 2011 to June 2012.  Cash holdings are continuing to run at relatively high annual rates because a lot of people are keeping their funds in currency these days because of the bad economic times.  This high of a rate of increase in currency holdings is a sign of weakness in the economy and the bad financial condition so many people find themselves in.  It is not a sign of economic health.

The M1 money stock measure increased by 16.0 percent over the past 12 month period.  One can note right off that this figure is down from the March 2011 to March 2012 period which was 17.4 percent and also down from the December 2010 to December 2011 period which was 18.4 percent. 

Since the rate of increase in currency outstanding has not changed much from the end of the year, this means that the other components of the M1 measure of the money stock have declined.  And, this is true.  The June-over-June rate of growth for the non-currency component of the M1 measure of the money stock now rests at 16.0 percent. 

The M2 measure of the money stock was growing by a little more than 9.0 percent in June, down since the end of last year, but this decline has not been caused by a drop in the non-M1 component of M2 which has remained relatively constant through the first half of 2012. 

The movements of funds are very clear:  small-denomination time accounts at financial institutions are down by 17.0 percent, June-over-June; retail money funds are down by almost 3.0 percent; and institutional money market funds are down by almost 8.0 percent. 

Individuals are moving funds from short-term interest bearing assets to currency holdings and transaction accounts either because of their economic situation or because of the low interest rates.

As a consequence, the required reserves at commercial banks have grown quite rapidly.  Since, there are so many excess reserves in the banking system, the total reserves in the banking system can decline while the required reserves in the banking system can increase.  This is not the case in more "normal" times. 

And, the transaction accounts at financial institutions can also increase at historically high rates, at almost 28.0 percent, year-over-year, and yet this rise is not looked on as inflationary because of the massive movement of funds around the financial system.

It can be seen, however, that loans and leases within the banking system are now increasing at a faster pace.  Total loans and leases increased at a 5.3 percent year-over-year rate in June, the highest rate of increase in a long time. 

More specifically, commercial and industrial loans (business loans) expanded at a 14.0 percent annual rate in June, with C&I loans at the largest 25 domestically chartered banks in the United States rising by almost 17.0 percent.  This is the strongest showing since the economic recovery began.

The questions one must ask here are about the type of business loan the banks are making and what kind of impact are these loans having on the various measures of the money stock? 

At the present there is no indication that these business loans are going for productive uses, for purchasing physical capital goods…investment goods.  They may be going into the financing of inventories…physical goods that are not getting sold…or information technology.

Furthermore, if these loans are having any impact on the money stock measures it is small relative to the huge flows of funds coming into the transaction-type accounts from short-term interest bearing assets.  Hence, they cannot be seen as “inflationary” at the present time.     

Commercial real estate loans continue to decline, both at the largest banks and in the rest of the banking system.  As I have discussed many times, this decline will continue well into next year because of the condition of the commercial real estate market.

Interestingly, consumer-type loans at the largest banks, consumer credit and home equity loans, declined over the past year while these types of loans did increase modestly at the smaller banks.

I still have a great deal of concern for the health of the “smaller” banks in the banking system.   Five more depository institutions were closed this past week bringing the total number of banks closed this year to 38. 

But, this is not the only number we should be looking at.  From March 31, 2011 to March 31, 2012 82 banks were closed in the United States.  But, over the same time period, the number of banks in the banking system dropped by 190.  Obviously, quite a number of banks left the banking system during this time period through merger or acquisition.  It is my view that the banking system will continue to lose individual institutions from its numbers, maybe not at the almost 4 per week rate of the period ending March 31, 2012, but at a similarly rapid rate for the next twelve months are so.  This is what the Federal Reserve and the FDIC are attempting to achieve as smoothly as possible. 

The pressure may be lessening in this area.  Over the past three months, the cash assets at both the largest 25 domestically chartered banks in the United States have declined, as have the cash assets at the rest of the domestically chartered banks.  And, excess reserves in the banking system have also declined modestly.

My interpretation of the stance of the Federal Reserve right now is to accept the high rates of growth of the M1 and M2 measures of the money stock as these rates are due to individuals and businesses re-arranging their assets and not due to the Fed’s monetary stimulus.

Business lending may be getting stronger, but, as of this point in time, there is little or no indication that this lending is going into constructive physical assets.  This area, however, needs to be watched.  On the other side, one also needs to continue to watch what happens to the commercial real estate area.  As discussed before, many of these loans are loans that are paid off at maturity and these maturity dates are coming due over the next 12-to-36 months.  Many of these loans may not get refinanced.  This could be very difficult on the banks…especially the “smaller” ones.

Finally, the Federal Reserve…and the FDIC…are still keeping a close eye on the health of the banking system.  Especially the Fed does not want to do anything silly at this time…like it did in 1937…and prematurely remove excess reserves from the banking system before the system is ready to “let them go.”  I still believe that there are a lot of banks in the system that are technically insolvent and that the Fed and the FDIC are being extra careful to “not rock the boat” while these institutions need to be closed or merged out of business.  This remains a major concern at the Fed.   

Loan Growth Continues to Pick Up at Commercial Banks

My report on bank lending last month had the headline, “Finally, some real loan growth at the banks.” (http://seekingalpha.com/article/426601-finally-some-real-loan-growth-at-the-banks)

Well, loan growth has continued through March.  Loans and leases at commercial banks increased by over $10 billion in March, bringing the total rise in loans and leases up to $95 bullion for the first quarter. 

The interesting thing is that this increase occurred predominately in the “small” banks in the country, the roughly 6,265 banks that comprise the Federal Reserve’s definition of small.  The “large” banks are the largest 25 domestically chartered commercial banks in the country.  A total of $79 billion, or, 83 percent of the increase in loans and leases at commercial banks in the United States over the first quarter, came from these “smaller” banks. 

This is certainly good news.  Economic growth in the United States had been rising since June 2009, but the growth rate has been pretty tepid.  Two reasons for the slow growth were that many individuals and businesses in America were deleveraging and the commercial banking system was trying to get itself in order given all the bad assets that were on the balance sheets of the banks. 

The concern has been that as long as the banks were re-structuring and individuals and businesses were attempting to lessen the debt on their balance sheets, economic growth would remain shaky.  For things to feel more secure, banks would have to start lending again. 

Loans and leases at commercial banks were up 4.7 percent, year-over-year, in March.  Almost two-thirds of this growth came in the past six months, and over one-third of the growth came in the last three months.  This is encouraging.

In the smaller commercial banks, the largest increase in loans came in the residential real estate area.  Residential loan growth rose by more than $31 billion in the past quarter and about $53 billion in the past year. 

The interesting “turn-around”, however, was in commercial real estate loans.  For the year as a whole, commercial real estate loans at the “smaller” banks were down by almost $13 billion, but, for the last quarter they were up by more than $14 billion, a $27 billion reversal. 

Commercial real estate loans were still down in the largest 25 banks by over $5 billion in the quarter, but on the whole, the strength shown in this area is ‘hopeful” and worthy of continued watching.

Business loans at commercial banks (commercial and industrial loans) have been up year-over-year for several months now, but the real strength has been at the largest banks.  For example, year-over-year, commercial and industrial loans at the largest 25 banks in the country were up by almost $105 billion compared with an increase of $42 billion at the smaller banks. 

However, in the first quarter of 2012, business loans at the largest banks rose by $25 billion as compared to a $24 billion increase in the “smaller” banks. 

This, to me, is a good sign for economic growth.  Although it may not translate immediately into much faster growth, I take this strength in lending as protecting against a downside fall-off.

Consumer lending was particularly weak in the first quarter of 2012 as consumer lending fell by more than $2 billion.  This would seem to indicate that consumers were still consolidating and/or reducing their debts and were not out spending.  This, of course, can help to account for the continued weakness in economic growth. 

Overall, the information coming from the banking system is encouraging.  Commercial bank lending is increasing and it is increasing in both the business and real estate sectors of the economy.  Furthermore, bank lending is showing more strength amongst the “smaller” banks in the country.  This is good news to me not only because it might indicate that “main street” is beginning to show some life, but this could also be an indication that the health of the “smaller” banks is improving. 

One final point has to do with the cash balances carried by the commercial banks.  In March 2011, commercial bank cash holdings averaged $1,443 billion.  In March 2012, cash holdings averaged $1,594 billion, up $151 billion for the year.  Commercial banks are still carrying a lot of cash on their balance sheets.  (According to Fed statistics, excess reserves in the commercial banking system averaged $1,362 billion in March 2011, and averaged $1,510 in March 2012.)

However, this cash figure for March 2012 is down from the $1,838 figure of September 2011.  So, commercial banks are holding less cash now than they were at certain times last year. 

One reason for this is that foreign-related institutions are holding a lot less cash than they were last year.  In September 2011, these institutions held almost $1.0 trillion in cash assets.  In early April 2012, this figure was down to about $650 billion.  A large portion of these assets were lent out to “related foreign offices” of the foreign-related institutions.  From March 2011 to a peak in February 2012, roughly $285 billion flowed from these foreign related institutions to their “related foreign offices.”  These flows were closely connected with the financial problems being faced in Europe.  With the efforts to resolve the debt crisis in Greece and with the lending down by the European Central Banks, the needs for cash from the United States lessened.  Lending to “related foreign offices” fell by almost $90 billion between early February and early April as the pressure from the crisis in Europe receded. 

We are not yet out-of-the-woods in terms of the problems in Europe and in terms of our need for stronger economic growth in the United States.  However, particularly concerning the latter, I feel better now that commercial banks seem to be producing more loan growth.   We can only hope that this loan growth will continue to modestly expand.  

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.      

Finally, Some Real Loan Growth at the Banks

It finally looks as if the commercial banking system is starting to do some serious lending.  My last review of the banking statistics focused on the continued flow of funds in the United States banking system to foreign banks and then to deposits in the foreign offices of these banks. (http://seekingalpha.com/article/344571-developments-in-the-banking-sector-still-flowing-to-foreign-institutions) 

At the time, this flow of funds dominated everything else going on in the banking system…especially the lending activity. 

There had been a little pick up in commercial and industrial (business) loans at the largest 25 domestically chartered banks in the last quarter of 2011, but the increase was not too exciting.

Over the last two months or so, business loans at commercial banks have picked up more steam and a good portion of the increase has come at the other (approximately) 6,265 “smaller” commercial banks in the banking system. 

Also, commercial real estate loans and residential loans (home mortgages) showed some strength over the past two or three months at these “smaller” commercial banks.

For the last two years or so I have been looking for some life in the lending portfolios of commercial banks.

I believed that the economy was growing but very modestly.  My concern was that there was so much debt in the economy, household as well as commercial (both in terms of business loans and commercial real estate) that the economy would continue to drag along without much oomph. 

My concern was that households and businesses still needed to do additional de-leveraging before the commercial banks would start lending again and commercial banks needed to start lending again before there would be much life in the economy in terms of economic growth.

Now, I believe, that we are really starting to see some life in bank lending.

Over the past three months, loans and leases on the books of commercial banks in the United States increased by just about $80 billion.  Of this total, $54 billion came in the past month. 

And, to me the surprise in these numbers was the fact that over 85 percent of the increase in these loans came at the (approximately) 6,265 “smaller” banks in the United States.  The totals for these smaller banks were $69 billion and $46 billion, respectively.

Loans and leases on the books of the largest 25 domestically chartered banks in the United States continued to increase over the past three months, but not at the pace experienced by the other banks. 

Not only did commercial and industrial (business) loans increase at the “smaller” banks but there was a pick up in real estate area as well, something that had been sorely missing in earlier.

Whereas commercial and industrial loans at the largest 25 domestically chartered banks rose by almost $26 billion over the last three months, these loans rose by over $20 billion at the “smaller” domestically chartered banks.  In the last month the increase was less that $8 billion at the largest banks and over $10 billion at the “smaller” ones.

The surprise was that commercial real estate loans rose by $17 billion at the “smaller” banks over the last three months while they continued to decline at the largest banks. 

Furthermore, residential real estate loans rose by more than $23 billion at the “smaller” banks in the last three months with $16 billion of this increase coming in February 2012.

To me, this loan growth is GOOD!  It is good for the banks and it is good for the economy.   Let’s just hope it continues!

As far as the foreign-related banking institutions are concerned, cash assets at these banks rose by just about $260 billion over the past twelve months which was 75 percent of the increase in the cash assets of ALL commercial banks in the United States.  This was the concern mentioned in the first paragraph of the post.

The thing about this that we have been watching so closely is that at these banks, Net Deposits to Foreign Offices rose by almost $480 billion during the same time.  The timing of these increases coincided with the sovereign debt problems occurring in Europe and this seemed to indicate that monies being put into the American banking system were being channeled to Europe to help the banks and financial system over there. 

The Federal Reserve System also moved to offset the pressure being felt by the European Central Bank (ECB) and other central banks closely connected to the eurozone by opening up its liquidity swap line with these other central banks. 

Furthermore, the ECB also began to lend on a three-year basis to European banks.   European banks took out more than $1 trillion of these loans by March 1, 2012.

All these actions have resulted in a decline in the cash assets of the foreign-related financial institutions in the United States and basically no change in the net deposits due to the foreign offices of these institutions.  Over the past three months the cash assets of this banks have declined by more than $82 billion, about $52 billion of the decrease coming in the past month. 

So, for the time being, the liquidity problems arising from the sovereign debt crisis in Europe seem to have receded.  However, we will need to keep our eyes on this situation as some pressure is released from the Greek situation and is transferred to other European nations like Portugal and Spain.

So, I am a little encouraged.  But, I don’t want to go overboard in my enthusiasm.  It is good news that commercial bank lending has increased some over the past several months, especially at the “smaller banks”.  It is good news that foreign-related financial institutions seem to have slowed their demand for funds from the United States.  It will be more good news if economic growth accelerates a little bit.     

Commercial Banks Can't Get a Break!

Commercial banks, other than the very largest, just cannot get a break these days.  With their numbers shrinking and numerous loan problems still to be faced, “main street” bankers are facing more and more competition from another group of interlopers…credit unions. 

The commercial banking industry got rid of another bunch of competitors…thrift institutions…and now they are challenged by another not-for-profit upstart. 

In the 1950s and 1960s commercial banks were threatened by the “mutual” savings and loan associations and the mutual savings banks, but the government created credit inflation pushed the thrift industry towards insolvency as interest rates rose along with inflationary expectations. 

The thrift industry was “saved” as numerous savings and loan associations and mutual savings banks converted to “stock” institutions…as it turned out the best thing that could have happened for the commercial banking industry.

Full disclosure: I led the mutual savings bank Wilmington Savings Fund Society (WSFS) into a stock conversion and initial public offering as CFO in the 1980s and I was the President and CEO of a “converted” savings and loan association, First American Savings, into the early 1990s.

The thrift industry, with many of its institutions converted to “stock”, with expanded capabilities of lending and non-bank subsidiaries, basically self-destructed in the thrift crisis of the early 1990s.  The industry never recovered and essentially went out of business in 2011.

Full disclosure: Wilmington Savings Fund Society is still in existence and healthy; First American Savings…or at that time, Flagship Financial Corp…was a healthy institution acquired by PNC bank of Philadelphia in 1991.

Now, the commercial banking industry is being attacked from another angle.  Not only has the credit union industry changed dramatically over the past ten years, but it is healthy and growing.  Some credit unions have been able to shed their very narrow “field of membership” and now have become a significant “banking” force within their local region. 

To re-emphasize…credit unions are non-profit organizations and are tax-exempt institutions. 

They have been very local in orientation and have been very customer orientated.  Many credit unions have specialized memberships either associated with specific organizations…churches, police departments, and schools…or restricted geographical markets.  Also, there are many credit unions that bear a “low income” designation and work closely with local communities in an effort to encourage financial knowledge within the community.

But, some of the credit unions are getting a little pushing.  Now, credit unions are asking for Congress to raise the member business-lending cap for a few of the larger credit unions from 12.25 percent of total assets to 27.5 percent.  And, guess what…the legislation is actually bi-partisan being introduced by the Democratic Senator from Colorado, Mark Udall, and House Representatives Ed Royce, a Republican from California, and Carolyn McCarthy, a Democrat from New York!

The American Bankers Association is against this legislation!  Surprise!

As a backup, however, the American Bankers Association, also signed by 50 state bankers associations, has sent a letter to all House and Senate members arguing that any credit union that obtains increased business-lending authority should pay taxes.

Well, you have to be prepared if you lose the first battle. 

What’s going on here?

Banking is changing.  The big banks are getting bigger and are moving more and more into electronic payments.  JPMorgan Chase & Co., Capital One Financial Corp., and Barclays PLC have moved to let customers use a mobile-payments service. (Wal-Mart Stores, Inc. and Target Corp. along with about two dozen other retailers are working together to develop a mobile-payments system to compete with similar efforts of Google, Inc. and big cellphone companies.)

Note that the banking communities in the developed world seem to be behind those in the emerging nations when it comes to mobile banking. (See “The End of Money” by David Wolman)  One of the leaders in this effort for the less-developed world is the Bill and Melinda Gates Foundation.  Lots of “stuff” is happening here.  And, the technology is there.   

Mobile banking in emerging nations is bringing banking services to the poor and less serviced population in these countries.  But, one of the secrets to this effort is economies of scale.  Mobile banking works best where a “service” has millions of customers, not tens of thousands.

My point is that the smaller banks cannot create such systems.  Furthermore, for the poor or disadvantaged, “commercial, for profit” institutions are perhaps not cost effective.  “Commercial, for-profit” banking institutions are not economically feasible

As we move into the new banking world with the new regulations, I see the industry bifurcating more and more into community organizations that deal with individuals that do not have large asset holdings and primarily need transaction services and places to build up individual/family savings, and larger institutions that are almost totally internet-based that provide a multitude of products and services and allow their customers to transfer funds between classes of assets easily and in real-time.

“Commercial banks” may not be the economically effective way to serve this the former population.  Here, credit unions, mutually owned, may fill in this gap.  The latter market, however, will be served by bigger institutions that allow their customers to manage their portfolios on-line and not work with independent deposits and assets classes, as is now the case.  (There is one question about these larger institutions…will we be calling them “banks”?) 

There will be a third player in this area…the provider of mobile banking services.  These service providers may or may not be owned by a bank but may work with banks much as the credit card companies have.

This is just a simple view of the possibilities for the future.  The fact is that this future is being created right now.  Commercial banks, especially all the ones below the largest twenty-five or so, are under a severe threat.  As in the 1970s and 1980s when the structure of the depository institutions industry was threatened by credit inflation and changes in information technology, the structure of the industry now finds itself under attack from what remains of the financial crisis of the past several years and the changes in information technology. 

Looking back to the 1960s and 1970s who would have ever thought that the thrift industry would disappear?  Now, I believe, we are facing another huge change to the structure of financial firms.  It will be interesting to see what results.