Strong Dissent to an Analysis of Banking

By Bove, Richard X. | American Banker, August 8, 1991 | Go to article overview

Strong Dissent to an Analysis of Banking


Bove, Richard X., American Banker


Strong Dissent To an Analysis Of Banking

The banking industry has been in a state of dynamic change for the past decade. These changes reached flashpoint in the past two years, forcing government regulators and the industry to adjust operating strategy.

Bank managements have been forced to rethink their businesses, cost structures, and their ability to compete within a broad spectrum of financial products.

While the process has been inordinately painful, the industry is benefiting from the exercise. Change is now proceeding at an even more rapid rate.

It is therefore discouraging to read analyses of banking that are essentially backward looking in nature and unmindful of the current forces impacting the industry. This type of analysis was evidenced in the three-article segment about the industry published in May by Institutional Investor Magazine.

During the past three decades, the traditional service-oriented banking business in the United States has been battered by three forces:

* Emergence of the Eurocurrency markets. Today, reliable estimates indicate that this fund source is double the size of the domestic money supply as measured by M-2 ($7.0 trillion versus $3.4 trillion). An organization that wishes to offer banking products does not need a branch-banking system and core deposits to obtain a ready supply of funds.

Technology Trailing

* Improvement in technology. Any company with off-the-shelf products can develop systems that account for millions of transactions in real time, daily, or be up to the minute on market prices around the world for virtually any financial instrument.

* A major change in the nature of the American industrial corporation. As a result of the adoption of outsourcing techniques, cash flows inside these companies have changed. Money that once was diverted to the building of stamping plants or opening iron-ore mines in Brazil is now utilized for the purchase of financial assets.

Companies such as General Electric, Ford, Sears, and AT&T were able to establish banking capabilities - even though they lacked branch-banking systems. To operate as banks, however, these companies had to wean American consumers and corporations away from their traditional method of handling financial transactions: They had to get the customer out of the bank.

This was done by crafting systems that sold financial products on demand. For example, you, personally, undoubtedly have the capability of direct depositing your paycheck into a financial institution (bank or nonbank) without leaving your office. Through the use of sophisticated cash-management systems, your company has the same capabilities.

The key to obtaining financial business is to have systems that provide products on demand and to provide the products at lowest cost. The key to losing the business is to operate from obsolete distribution systems that are inherently high-cost in nature; that is, to practice service-oriented relationship banking.

Incorrect Reaction

The problem with the FDIC arose because the government reacted incorrectly to the above trends. Thrift institutions had become obsolete because they did not have the capability of providing low cost/high yield services on demand.

The CMA account at Merrill Lynch and the newly evolving mortgage markets had obviated the need for thrifts. The inverted yield curves of the 1960s and 1970s were only the last straws.

The government could have solved this problem either by regulating the new financial-product sellers or by letting the thrifts die. It did the opposite. It let Merrill Lynch and others get at the FDIC through brokered deposits and increased its subsidy of the thrifts through a variety of techniques.

As the nonbank banks systematically took market share from the depository-institution banks, the inevitability of large losses grew. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Strong Dissent to an Analysis of Banking
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.