Magazine article American Banker

What the Dollar's Decline Means for Your Bank

Magazine article American Banker

What the Dollar's Decline Means for Your Bank

Article excerpt

The dollar's slide should come as no surprise. For years we have been operating with record budget and balance of payments deficits and counting on foreigners to finance them by buying American securities.

Now overseas holders of our debt are wary about the future of the dollar. Many have been turning to euro-denominated securities instead. As a result, the dollar has fallen from 80 cents per euro at the beginning of the century to $1.34, and some economists have predicted that the euro will be as high as $1.60 by 2008.

Anyone who has traveled to Europe recently and has had to pay for food and lodging knows how much less the dollar buys. But what does its decline mean for community banks?

Far less, of course, than for money-center banks that trade in foreign currencies all the time. But still, there are important implications that should affect community banks' service offerings, their evaluation of the prospects of their borrowing customers, and maybe their own future as independent organizations.

Look first at services offered. A number of Americans have been wondering how they can protect their savings from the shrinking dollar. It is certainly feasible for community banks to offer euro-denominated savings accounts, whose proceeds the local banks would reinvest in euro deposits with their own foreign correspondents. Community banks could provide this service with a moderate commission and no risk of loss from currency changes.

How could the dollar's slide change the profit potential and thus the creditworthiness of borrowing customers? Those whose prospects depend on Americans buying or traveling abroad should worry. Travel agents and specialty importers in particular may well be hurt.

Conversely, banks whose borrowers are exporters should take heart in the fact that a cheaper dollar means more opportunities to sell abroad. …

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