Commissioner's Corner
By: Clancy Norris, Bank Commissioner
"Before you can be a bank regulator, you should have to be a banker and before you can be a banker, you should have to be a bank regulator". As Bank Commissioner, I can relate to this quote from Don Powell, FDIC Chairman. I certainly see the advantage that my banking background brings to my role as Commissioner and I know that having some regulatory experience would have been very beneficial in my banking career. I enjoyed seeing many of you during my recent Listening Tour and I want to thank you for taking time to attend the event. The Tour was an excellent opportunity to meet with our Kansas bankers and to share our common concerns. I'd like to give a summary of the topics which I discussed during the Tour and reiterate some important factors in today's banking.
What about the economy?
The economy is recovering, but not in the traditional manner. Even Alan Greenspan is puzzled by current economic trends, labeling them as a conundrum (a puzzle, mystery, or challenge). Usually a recovery is accompanied by rising long-term interest rates and the threat of rising inflation. However, the Federal Reserve Board (FRB) believes that inflation is well contained, and when the FRB dropped interest rates to the lowest level in years (1%) and kept them lower for a longer period than in the past, their policies were successful and we have had a successful economic recovery after a short and shallow recession. Even though the FRB has raised short-term interest rates, the usual prescription for an economic recovery, the expected concurrent rise in longer interest rates hasn't taken place. The yield curve is flat and getting flatter as the FRB continues to raise short-term rates. As might be expected with the flat yield curve, interest margins have dropped to a 15-year low. It would seem that this should be a difficult environment for financial institutions which earn their income largely on spread. Yet, 94% of all banks are profitable and first quarter 2005 earnings were at a record level of over $34 billion. Bankers made up for the loss of margin by improving their efficiency ratio and improving asset quality. This success is a tribute to bank Boards' and senior managements' ability to manage their operations in difficult times.
Can the banks continue to show record profits under current conditions? Probably not. In the long run, they can do only so much by cutting costs. But, a good profit can still be expected, especially if the asset quality remains good. A higher loan volume is a long term prescription for profit growth. Of course, this will depend on higher interest rates. And, if interest rates rise, it will probably mean a slowing or an end to our record home mortgage origination business.
According to William Seidman, former FDIC chairman, the period ahead will be difficult for bankers, but they can manage if changes in the economic environment (interest rates) occur slowly. If there were to be rapid changes, things will get more difficult. He states "as always, being an economic conservative (don't bet much on what interest rates will do) seems like the best way to go in uncharted waters. Just be ready!"
Do Mergers and Acquisitions (M & A) still matter?
You bet they do! Many large acquirers are still digesting earlier transactions and many institutions have had their attention diverted to accounting and governance regulations, but the banking industry still sees mergers and acquistions as a viable growth strategy. Today we have, according to the FDIC, 8,890 insured banks and thrifts in the United States. The vast majority of these banks are small -- 68% have fewer than $200 million in assets. M & A reached a three year high in 2004, with 271 transactions totaling $131.5 billion. There have been 1,406 transactions since 2000.
What is the latest on Wal-Mart?
Wal-Mart Stores Inc. has applied to establish a Utah industrial bank which would process credit card, debit card and electronic check transactions from its retail locations. The world's largest retailer now uses a third-party processor for the transactions. Wal-Mart's application with the Utah Department of Financial Institutions follows five years of attempts to get into banking. Previous plans to buy financial institutions in California, Oklahoma and to partner with a bank in Canada were unsuccessful.
Utah may present Wal-Mart its best chance for success. General Electric Co., Merrill Lynch & Co. and Target Corp. already have set up industrial banks in Utah. Industrial banks, also known as industrial loan corporations, are found in only a few states. They operate like banks with federal deposit insurance and can issue credit cards, take deposits and make loans. However, an industrial loan corporation cannot offer standard checking accounts if its assets exceed $100 million. At the end of last year, there were 29 Utah industrial banks, with combined total assets of more than $120 billion.
Wal-Mart has said that it intends to pass on the savings to shoppers and that it has no plans to open bank branches or lend money. But, when asked whether shoppers could someday shop for mortgages at Wal-Mart, financial services director Tom McLean replied, "We continue to look for what makes sense to the customer". Indeed, bankers are wary. They realize that this big retailer could ultimately change its business plan and engage in retail banking operations. However, please remember that community banks have a unique, intangible competitive advantage in the financial services industry - by virtue of the close personal relationships that you hold with the people in your communities.
