Back To The Future: 2012 - A Banking Odyssey
By Stephen M. Klein
June 2, 2010
A Glimpse Into The Future
Imagine, it is now 2012 and the economy and banking environment have started to settle out. We are down to about 7,500 banks and quickly shrinking as “merger mania” takes hold and many community banks seek their long-awaited exit.
The Regulatory Landscape
Lo and behold, after much ado about nothing, the only change is that the OTS is history. Fewer national banks exist as community banks realize they are not the favored ones. The dual banking system continues on with its many strengths and flaws. The Fed, FDIC and OCC still fight their turf wars.
The good news is the examiners are no longer on a search and destroy mission. The vast majority of the failures are behind us and the fear of Inspector General Reports a thing of the sordid past.
The New Order
A dozen or so big banks dominate the U.S. banking world, controlling almost 95% of the domestic deposits. Outrageous fees and overdraft charges continue to provide enormous noninterest income for the goliaths. And the new so-called “consumer compliance watchdog" tortures the small community banks while not making a real dent in the underlying abuses.
A return on assets of 1% is considered good, as is a 10% return on equity. Bank stocks are trading at tangible book, with merger premiums at 1.5 times tangible book. Capital requirements have been elevated (for the community banks of course), with 12% being the new 10% Tier I capital requirement. Loan loss reserves have moderated to 2% and margins have crept into the mid 4’s.
2012 and Beyond
It seems inevitable that the banking landscape will continue to contract as bankers and boards simply get tired and sell at the best available price with few if any new banks being formed to offset sales; the net result appears obvious.
With this contraction will come opportunities for the survivors who possess the necessary capital and foresight to seize the moment. Frankly, I suspect it will take a scorecard to keep track of the changing landscape and players in the Northwest.
What Does It All Mean
A lot of the same old, same old, but with different players. As my friend and former law partner Mark Lewington effectively said in a Puget Sound Business Journal article in 1996, “community banks will always be around, since they are a part of the fabric of this country.” How true that statement is, as community banks as a whole survived the incredible fallout of the 2008 economic debacle. They are here to stay, just in a different way.
