Banks and Regulators Break Faith With Consumers

Bank managements have put their institutions down a path away from their traditional mission, namely to take in deposits and, acting as intermediaries, to transform this base into consumer and commercial loans, using a modest amount of leverage. Financial intermediation and maturity transformation were the bread and butter of the banking model.

Having sat at the side of a respected banking analyst for many years, I was troubled by the increasing number of bank CEOs who trumpeted the growing importance of fee income, as opposed to net interest income, in their revenue lines.  Next, came the move to get into all sorts of other businesses, like asset management, mortgage lending, investment banking, trading, and unsecured lending, or credit cards. Consolidation, driven by changes in banking laws, was the next step.

Soon, consumers were faced with fewer choices for their banking needs.  Finally, the current financial crisis made the U.S. consumer banking  highly concentrated.  The top ten banks hold about a 50% share of deposits, according to the FDIC. The extensive network of community banks, your friendly neighborhood banker like Jimmy Stewart, can't really compete with their 20-30 bp cost of funding disadvantage compared to the larger banks.

After the latest financial crisis, with the advent of regulatory schemes advocating for bigger layers of equity and higher capital reserves, regulators are making the traditional bank model even more unattractive than ever.

The upshot of all this?  According to the WSJ, 80% of  U.S. financial institutions offered free checking accounts as recently as 2008, but the number is down to 59% now.  What this number doesn't highlight is that the biggest banks have abandoned this model almost completely, even for their better customers as everyone migrates into an asset gathering model, as opposed to a banking services model.

Credit unions and community banks which should really be havens for new immigrants to begin building their financial relationships are increasingly marginalized, and so piranhas like the pay day lenders and all other forms of predatory financing are flourishing among a vulnerable population.

All these regulators looking backward at yesterday's problems have created incentives for rational bank CEOs to walk away from their primary mission as bank charter holders, viz. to serve consumers and small business customers with affordable, high quality financial services while earning attractive, but not outlandish, returns on equity.