Newspaper article The Christian Science Monitor

Contrary to Opinion, Banks Aren't Fading

Newspaper article The Christian Science Monitor

Contrary to Opinion, Banks Aren't Fading

Article excerpt

LAST May, economists John Boyd and Mark Gertler punctured a common myth about commercial banking: that it is a declining industry.

Banks, they said at a Federal Reserve Bank of Chicago conference, have not been losing market share in the United States to finance companies, investment firms, brokers, and other financial institutions. Rather, banks' share of total financial intermediation - that is, the taking in of deposits and making loans with that money - has been roughly stable over the last four decades. Banks perhaps suffered a slight loss of market share in the late 1980s and early '90s. But it was a transitory loss. Indeed, as their analysis implied, banks are now posting hefty profits and are eagerly seeking new loans and pushing investment services.

Alan Greenspan, chairman of the Federal Reserve, testified before Congress recently that bank examiners and surveys find that "banks are competing more aggressively for loans, and they are relaxing their credit standards."

"Lending margins in particular - and especially for medium and large corporate customers - have declined, and loan covenants and collateral requirements have eased," he said.

William McDonough, president of the Fed branch in New York, last month told a bank symposium: "While it is natural in a growth cycle to observe a moderate shift away from the often-stringent credit standards instituted during a down cycle, it would be a mistake to let the pendulum swing too far."

It was an earlier swing of the pendulum that partially raised the specter of a declining banking industry. Between 1985 and year-end 1990, more than 1,000 banks failed. They suffered record losses on loans to the third world, the real estate industry, farmers, and oil businesses. Moreover, nonbank credit alternatives - the finance companies, etc. - were growing rapidly.

"The banking industry is becoming irrelevant economically, and it's almost irrelevant politically," William Isaac, a former chairman of the Federal Deposit Insurance Corporation in Washington, now a consultant, was quoted as saying.

Economists Jane D'Arista and Tom Schlesinger, writing a paper on "The Parallel Banking System," last year called commercial banking "competitively disadvantaged. …

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