COLUMN: Banking's History Assures the Industry Has a Future
Olson, Mark W., American Banker
Byline: Mark W. Olson
Last month the American Bankers Association held its annual convention in Boston. In addition to bidding adieu to its capable but now departing president, Ed Yingling, the convention served its usual role as a gathering place for banking thoughts, ideas and concerns.
Perhaps the most disturbing concern expressed was that banking appeared to be changing to the point that bankers wondered about their personal futures and the future of the industry.
Typical questions included: "Can a bank our size continue to operate?"; "How will I find the talent necessary to meet all the new requirements?"; and even "Does community banking still have a future?"
Bankers indeed face a worrisome barrage of new regulations and oversight as a result of the recently enacted Dodd-Frank bill. They face a new agency charged with writing consumer regulations; expanded responsibility for all banking regulators, with particular emphasis on higher capital standards and tighter lending standards, and the unsettling reality for historic thrifts of knowing that their regulator soon will be merged out if existence.
But before we decide that the challenge is too great and it is time to get out, just remember, we have been here before, and we survived. In fact, we survived and prospered.
Let's review some of the most challenging times for bankers and how the industry adjusted and fought back.
In the late 1970s and early '80s, inflationary pressures took interest rates through the roof. In today's environment of benign inflation, it is hard to recall that in January 1981 fed funds peaked in the 19% to 20% range. At that time, banks were still locked into a regulatory environment that limited them to offering a maximum rate of 7.5% for savings, and even that was only available on six-year certificates of deposit.
When that regulation was loosened and banks gained the ability to pay closer to market rates on savings, many institutions were hampered by fixed-rate loans earning single-digit rates. Despite these apparently dire circumstances, most of the industry survived.
A generation of bankers schooled in the 1950s and 1960s had learned their trade in an environment when rates were fixed on both sides of the balance sheet. Deposit rates were fixed by Regulation Q, and consumer loans by state usury laws.
By the mid-1980s Reg Q was gone, and usury ceilings had either been repealed or subjected to adjustment based on market pressures. Banking changed forever, and the term "asset-liability management" was introduced into the industry lexicon. Instead of a static, inflexible rate structure, banks now learned how to set loan and deposit rates consistent with market pressures and with the need for a healthy net interest margin.
But this lesson was learned just in time to face the next crisis - caused by the collapse of the farm economy and - shortly thereafter - the commercial real estate and energy sectors.
Banks in states dependent on those three industries were severely affected. In Texas alone, where those industries make up a significant share of the state's economy, 368 banks failed from 1982 to 1989. …