Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. Tom served as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer. Tom currently is a market analyst for Forex Traders.
It is 2011, and although we are one more year down the road, American banking has yet to ignite a fire under our dormant economy by loaning to small businesses. Banks have forgotten their primary role as a bank, that being to issue credit and take risks. The Fed’s latest rounds of quantitative easing will do nothing to encourage banks to return to banking either, but the printing presses will increase the money supply, encumber the Treasury, and create the potential for currency wars with our international trading partners. Is now the time to consider nationalizing these recalcitrant lenders to cure our economic woes?
If it were that simple, then the idea would have floated to the top of the heap before Congressional elections, but banking lobbies are forever enriched with contributions to retard any more federal legislation from coming their way. The Dodd-Frank Act is enough to digest for a decade, and the issue of toxic mortgage-backed securities has yet to be dealt with completely. Fannie Mae and Freddie Mac may become poster children on future government bond campaigns, but investment and commercial banks prefer at present to stay in the shadows and draw their enormous bonuses very quietly at the end of this January. Public outrage may ensue, but skins tend to be thick in the banking sector.
Our largest banks were quick to return TARP monies loaned to them during the financial crisis, lest the long arm of government be given a chance to modify banking policies industry wide. Without TARP money and its accompanying restrictions, bankers can easily revert back to their old ways again. Huge bonus pools on the order of 40 to 50% of revenue have already been set aside for commission-based compensation rewards. Our weary bankers may have to tighten their belts this year as it is rumored that bank bonuses will be trimmed by 7%. This reduction will most likely be offset by a pay raise made at the start of the year or forex gains if working overseas, so don’t cry for your local banker. He will do quite well after trimming his staff and playing it safe for the year.
“Playing-it-safe” may not be the phrase that most would attribute to commercial banking over 2010. A new study just released by Greenwich and Associates demonstrates that banks have been remiss in coming to the aid of small to medium-sized businesses. Large corporations are flush with over $2.3 trillion on their balance sheets, refusing to invest domestically and thereby drive up employment. As per the study, “Credit conditions have failed to improve and in some cases even worsened in 2010. Approximately 70% of small businesses say they are concerned about their ability to access the financing they need to run their businesses in 2011, as do roughly 60% of middle market companies.”
Should the blame for this abysmal performance be place solely on commercial banking? The sad reality is that our regulatory establishment prevented most “green lights” from ever happening when it came to small business lending. Banks, still heavy with potential mortgage foreclosures that exhausted whatever loan loss reserves were available, were told not to lend by the Fed or the Controller of the Currency, depending on which regulatory jurisdiction applied to each bank. If the government owned the bank, it is doubtful whether this conundrum would have been broken.
The nature of banking in America is also counterintuitive to the global banking model present today. Our large investment banks are praised for creating the most efficient capital-raising engine in the world. Many are envious and pattern their exchanges after ours. Commercial banking is a “bag of snakes”. Where a major country might have five major banks, in the United States we have thousands of banks. There is strength and independence in numbers. The banking community tends to be less responsive as a result.
Consolidation has been the expected trend for years, and large banks have gobbled up smaller banks at will. However, when one bank is acquired, the management quickly leaves and set up three new banks to serve their loyal constituents. Consolidation may be happening, but the total number of banks rarely goes down. Attrition is a better reducing agent. Our banking infrastructure is threatening our competitiveness on a global scale, but bankers are loath to change the system. It is doubtful whether government officials, who do not understand banking, could ever attempt a massive reorganization, even if the banks were nationalized. Nationalizing banks sounds like a good way to scare banks in the press, but incentives block change from occurring. Bring back Glass-Steagall, the original act that separated investment and commercial banking. Tying commercial banking bonuses to loan performance in the small to medium-size business sector may be the better answer.
