The Incredible Shrinking Banking Industry: Fewer Players in a Riskier, More Complex Game

By Tannenbaum, Carl R. | Business Economics, October 2007 | Go to article overview

The Incredible Shrinking Banking Industry: Fewer Players in a Riskier, More Complex Game


Tannenbaum, Carl R., Business Economics


To some, the tumultuous events in the credit markets in the summer of 2007 came on suddenly and without context. While the extent and magnitude of the dislocations were certainly unexpected, the author argues that the groundwork for such events was gradually formed over the past generation by evolution within the financial services industry. The resulting new architecture of this industry has much to recommend it, but it may present a new type of systemic risk that will challenge policy makers.

**********

According to the old saying, we should be careful what we wish for, because we just might get it.

When I was interviewing for my job at the bank almost a quarter-century ago, I peppered my responses with tired bromides like:

  "I am a people person. I really want to work with people." "My
greatest strength is that I recognize my weaknesses." "I want a job that
is always changing. I never want to get stale."

It was this last platitude that kept haunting me as I was preparing this valedictory commemorating the completion of my year as President of NABE. The change that has enveloped the world of finance has come at a dizzying pace over the past generation, leaving those of us who work in the financial services industry wishing for a few moments of boredom.

I thought I would use this address to reflect on how banking and the financial markets have evolved over the past quarter-century. This exploration may contribute to better understanding of recent events, and offer some hints of the evolution yet to come.

When I was growing up, banking seemed like a very sedate vocation. Everything was orderly and formal, with imagery designed to create an aura of safety. My parents' generation, as survivors of the Depression, wanted assurance that their money was secure behind those Ionic columns; the FDIC sign in the window meant something to them. My brother and I were raised to value thrift, joining the weekly lines to have our passbooks updated shortly after beginning grade school.

Landing a job within a bank back then promised lifetime employment. The industry was very stable, with competition limited by regulations that controlled everything from the rates that could be paid on deposits to the geography of branches. Business was said to follow "the rule of threes": you paid three percent to your customers, lent the money out at a three percent spread, and played golf at three each afternoon.

1. Paradise Lost

Alas, the idyll didn't last. Figure 1 shows that the decade following the first oil shock of 1973 brought record levels of both interest rates and interest rate volatility. Many factors contributed to this development, but easy monetary and fiscal policy through the 1960s and 1970s certainly played a role.

The series of recessions that were endured during that decade battered loan portfolios and hampered profitability. Depositors that had once been content with three percent yields realized that their purchasing power was eroding at a rapid pace, and clamored for better returns.

Technology provided the means for customers to act on their discontent. Money and information began to move further and faster, and brokerage firms (ridiculed as "non-banks" back then) moved aggressively to capitalize. This began a process of "disintermediation" that continues to this day.

The industry that I entered in the early 1980s was in turmoil. Thrift institutions were paying ten percent for funding to support four percent mortgages. Commercial banks were stretching, lending to riskier sectors such as energy exploration, developing countries, and highly leveraged companies. Sound familiar?

All too often, these initiatives added to the industry's woes. More than 1,000 banks failed between 1980 and 1990. (1) Many others were forced to consolidate with stronger institutions. Today, we have only about half the number of commercial banks as we did twenty years ago. …

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

The Incredible Shrinking Banking Industry: Fewer Players in a Riskier, More Complex Game
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

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

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.