The Future of American Banking

The Future of American Banking

The Future of American Banking

The Future of American Banking

Synopsis

The future of American banking is in doubt and the industry and the federal insurance fund that helps support it are in turmoil. The ingredients of the turmoil have been simmering in public view since at least the early 1980s when commercial bank loans to lesser developed countries (LDCs) began to default. The difficulties began to boil at the end of the decade when the prospect first arose that the banks' deposit insurer, the Bank Insurance Fund (BIF) that is administered by the Federal Deposit Insurance Corporation (FDIC), might require dollars to resolve bank failure as occurred in the savings and loan debacle. This book frames the major economic and policy issues raised by the banking crisis whose resolution largely determines the future of American banking. It focuses on the current reported condition of the banking industry, concentrating on large banks in particular. A longer-run economic prognosis for the banking industry is presented and the implications of future bank failures for the financial services sector and federal regulatory policy are discussed. Most importantly the book contains suggestions for changes in the nation's deposit-insurance system and accompanying banking laws. These changes would reduce the federal government's deposit insurance liability and would provide banks with potentially profitable opportunities. The study includes a wealth of data on the financial condition of American banks and the system as a whole, some of it not easily obtainable from any other source. The authors are internationally recognized as knowledgeable experts on the state of the American banking system and the options and prospects for US banking reform.

Excerpt

This nation faces an almost unprecedented situation with many of its largest banks operating on--or conceivably, over--the edge of insolvency. Debating on which side of the line they currently fall is unproductive. The key fact is that by any reasonable standard many banks not only have weak balance sheets but they also are highly exposed to additional deterioration. Their already eroded capital is at risk due to their significant involvement in high-risk lending, the "kryptonite" of the banking system--generally loans for commercial real estate and corporate restructurings--that are so toxic that they threaten the biggest banks.

Perhaps most disturbing of all, the fundamental structural changes occurring in the banking industry will impel even those institutions that survive the current banking crisis and the nation's current economic sluggishness to take greater risks in the future. An expanding number of financial-service firms increasingly from around the globe are competing against U.S. banks with a wider menu of products. Yet, at the same time U.S. banks are excessively constrained in where they can locate, who can own them, and the products they can provide by outmoded laws that have been on the books since the 1930s. We can expect greater risk-taking and more failures unless the laws currently governing the banking business are substantially modified.

Not since the creation of deposit insurance in 1933 have the U.S. banking industry and its deposit insurer been as troubled as they are today. Indeed, the future of American banking is in doubt. The ingredients of the turmoil have been simmering in public view since at least the . . .

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