New Developments in Commercial Banking [antikvár]

PREFACE by Donald H. Chew, Jr. The U.S. commercial banking industry has fallen on hard times, and the prospects are not encouraging. Bank profits have been squeezed between rising write-offs and shrinking loan volume, dividends have been cut sharply, and stock prices have fallen to levels not seen, in many cases, since the early 1970s. To be sure, most of the large money-center banks have long sold at significant discounts to their book values, reflecting their consistent failure to earn adequate returns on investor capital. But since the beginning of 1990, bank stock prices have plummeted some 40 percent on average—a sign that market investors expect future bank profitability to fall well below even the standard of mediocrity established over the last two decades. The fundamental causes of the current predicament in banking have been with us for a long time. Consider that this book begins with a Roundtable discussion of the "Future of Commercial Banking" that took place in 1987—^well before the first signs of the huge losses to come on real estate and HLT loans. Even then, there was general agreement among bank observers that the LDC problems troubling the industry were only the most visible sign of distress. Of far greater concern was excess capacity in the basic corporate lending business. As one bank adviser argued, the "wholesale" banking industry was then in the same position as the oil industry in the early 1980s: namely, chronic overcapacity, leading to price wars, thin margins, and thus clearly inadequate returns on banks' increasingly risky loan portfolios. One bank executive summed up the situation as follows: "The presumption that there can be 14,000 banks, 14,000 adequate CEOs and CFOs, and 100,000 adequate lending officers in this country is a non-starter for me. It just cannot be." The consensus of the Roundtable participants was that some kind of radical restructuring of the industry was necessary to restore adequate levels of profitability. There was less agreement on what form that restructuring would take, but the most likely solutions would involve further consolidation through mergers and, regulators willing, takeovers and failures. Also predicted were bank sell-offs of unrelated businesses (in effect, a reversal of the 1970s trend toward full-service banking) and the adoption of more powerful incentive compensation schemes. By far the strongest incentive of most bank CEOs—as in much U.S. industry prior to the restructuring of the 80s—has been to expand the size of their organizations. And the consequence, more often than not, has been that bank returns to stockholders have lagged ever farther behind market-wide returns while assets under management have continued to grow. Unlike the oil industry, however, which quickly rid itself of excess capacity with some prodding from corporate raiders, commercial banks have only begun to undertake the drastic retrenchment necessary. For example, recent decisions by Citicorp and Chase Manhattan to lay off some 10 percent of their workforces, although a step in the ri^it direction, are almost certain to prove half-measures at best. What has stood in the way of the required "downsizing" is a web of legal and regulatory barriers that have reduced banks' comparative advantage over non-bank competitors in their basic businesses. On top of that, Glass-Steagall has made it difficult for banks to enter some markets now dominated by investment banks where they might be expected to succeed—markets that banks in faa once dominated prior to the passage of Glass-Steagall. But undoubtedly the greatest impediment to necessary change is the insulation of large banks— again, by regulation—from the natural purges of failure and hostile takeover. Legitimate concerns about proteaing the deposit insurance fund and the payment system will inevitably require government oversight in some form. But it also seems clear that such concerns are being exaggerated by bank executives and regulators to protect their institutions (not to mention their jobs) against competitive forces that must cause many of them to disappear. Commercial banks, then, are still only in the beginning stages of this restructuring process. And