Let's all say goodbye to banking as we know it. The writing is on the wall. Or, should we say, the writing is in the new Dodd-Frank financial reform bill.
For many years, community banks have handled the financial needs of local towns and communities. These banks took in deposits, made loans, and earned a small margin in between.
Then someone in our government decided that these banks should loan money to folks that might not be able to pay the money back. This was called the Community Reinvestment Act and it empowered regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods."
The two government-chartered mortgage finance firms - Fannie Mae and Freddie Mac - encouraged this "subprime" lending by authorizing ever more "flexible" criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued. Most of the "bad" loans in this country were bought by either Fannie Mae or Freddie Mac.
We have all seen the results of this Act over the last couple of years.
Many community banks made a lot of real estate loans based on the fact that 1) they "ain't making any more land!" and 2) real estate values had historically increased. In the fall of 2008, the regulators decided that real estate loans were bad and proceeded to force these community banks to quit making real estate loans and to write down the loans they already had.
As the required capital dwindled in these banks, regulators forced the banks to raise more with the threat of a "cease and desist" order. This basically told the directors to raise capital or they would shut down the bank. This "order" became public knowledge and was published in many hometown newspapers. Guess what happened next.
Remember the movie It's a Wonderful Life? Well, being a bank officer and director during this time wasn't exactly a wonderful life. Depositors were going into the banks and withdrawing their money while the real estate borrowers quit paying their loans, telling the banks they would just buy these loans back at 10 cents on the dollar from the FDIC when they failed. And that is exactly what they were able to do. The FDIC would shut the banks down and then sell the loans for 10 to 20 cents on the dollar. Many of these banks had participated these loans out with other banks, so when one bank was shut down, it contributed to other banks failing as well.
Now the Dodd-Frank legislation has come along, which will put the nail in the coffin for many more banks. This law will add a lot more cost to banks with the increased reporting, analysis and requests for information. These expenses will be in addition to increased FDIC insurance costs the FDIC has imposed to pay back its losses.
What does all of this mean to a bank's customers? Ultimately, banks will have to start charging more for checking accounts and other services. In fact, Bank of New York has even started charging customers for depositing large amounts of cash. An article in a recent issue of Fortune magazine stated that an estimated 4 million customers left the biggest 30 banks last year because of fees and an additional 11 million are expected to leave this year.
Where are they going? Many are buying prepaid debit cards from companies like Wal-mart and American Express. They are also heading in record numbers to payday lenders like Cash America International and Quicken Loans for mortgages.
So what does all of this mean for banks? Well, things will need to change.
Banks must stop assuming that customers will just walk into their bank because they are convenient. Just like any other business, they'll have to start calling on potential customers. They'll need to start marketing themselves more. They'll have to promote services like remote capture deposit and online bill pay. And they'll need to customize and personalize their products and services to fit the needs of individual customers.
Many investment bankers are predicting that in the future there will no longer be banks with less than $500 million in assets. Banks will either grow up or they'll be gone. Small community banks need to get busy!
