Phase I of the banking revolution, the wild- and-woolly growth phase, is over--brought to a jarring halt in 1974 by inflation, recession, and the excesses of the bankers who made the revolution.
Now, banking has moved into a new, more conservative phase--the shaking out and refining that inevitably follows the sort of frenzied growth the industry has just witnessed: loans up 170% to $547-billion in a decade, assets up 143% to $917-billion. Banks became holding companies and then financial conglomerates in that decade, stretching out across the U.S. and the world.
But super growth bred super problems, and suddenly bankers, along with customers, regulators, and legislators, are having second thoughts. And it is dead certain that for banking the next 10 years will be far tamer than the past 10, with slower growth in both loans and total assets, and with fewer borrowers welcome at the banks.
"Go-go banking has had its day as a fashion," says Paul K. Kely, vice-president of First Boston Corp., the New York investment banking house. Adds M. Brock Weir, chairman and chief executive of Clevetrust Corp., the holding company ($3.9-billion in assets) that owns Cleveland Trust Co.: "There has been a change in direction in the minds of bankers. We were guilty of excesses. We got caught up in giving analysts a thrill a minute."
The banking system's problems are serious--with an overhang of very shaky loans the most visible one. The odds are now against a tidal wave of bank failures, here or abroad. But there probably will be further casualties, and another bank or two may join the list of failed giants that already includes U.S. National Bank of San Diego, Franklin National in New York, and Security National in Long Island.
So the U.S. banking system is in retreat today, and a banking system in retreat has implications for the economy as profound as a banking system in full advance. Plainly, the banks are not lending money, at home or abroad, as they did even six months ago. Nor are bankers as quick as they used to be to fund long-term loans with such short-term money as federal funds (the excess reserves of banks).
It is not banking in the manner of the 1930s and 1940s, when bankers simply waited for customers to seek them out. But it is far more conservative banking than anyone has seen in more than a decade. And it is a change mandated not only by the depth of the recession and the relative tightness of monetary policy but also by a clear acceptance by bankers that they had reached too far, taken too many risks, and must retrench before more big institutions get into trouble.
"Last summer scared the pants off some of these bankers," says John C. Poppen of Booz, Allen & Hamilton, the management consultants. "I don't mean the 60-year-old bankers, I mean the 35-year-old tigers." Says Professor Paul Nadler of Rutgers University: "A lot of the bright young tigers are not tigers anymore."
Some of this will change when monetary policy eases and the economy shows clear signs of reviving, but the crucial fact is that some elements of this new conservatism will linger through the rest of the 1970s and probably beyond that. If the buzzword of the past 10 years was "growth," then the buzz- word of the next 10 years will be "quality," and that goes not only for the banks but for those who lend to and borrow from the banks.
When the chips were down last summer, after Franklin National had started its plunge toward failure and Germany's Bankhaus I. D. Herstatt had failed, it was only the giant money market banks of New York and Chicago, along with a few institutions from Boston, Philadelphia, and the West Coast, that could still get unlimited funds at the best possible price. Other banks, including the