Banks and Banking
Business Banks and Commercial Banking
Any discussion today about banks and banking is likely to be entirely different than just a few years ago. The world of commercial banking and business banks has changed so dramatically that it is hard to tell how the story will end.
Small business owners in particular have been negatively impacted by the recent financial chaos exhibited by financial institutions. For small businesses, a big part of the story is evaluating if there are practical and effective alternatives to traditional banks. Another key chapter in the story involves new banking terms (for many of us) such as "Zombie Banks" and "Problem Banks." Such problems have also contributed to phrases like "Too Big to Fail" and more recently "Too Big to Jail" — such descriptions are certainly not confidence-builders when we are thinking about bankers.
The role of banks has often been at odds with the goals of society and individuals. But just because there is a rich history of banking problems does not make it any easier or more acceptable for most of us. My work has primarily involved helping individuals and small businesses to work more effectively with commercial lenders. I am constantly learning more about prudent business lending alternatives and hope to share some of this wisdom with all of you. Are you looking for a banking scorecard?
Elizabeth Warren Calls for Breaking Up the Banks— Magazine headline, April 2015
"Nevertheless, She Persisted"
In addition to her accurate warnings about the looming dangers in the banking industry, Elizabeth Warren continues to speak her mind on all issues of importance. In a highly publicized example that occurred in the early part of 2017 (February 8), the Senate Majority Leader (Mitch McConnell) attempted to silence the Massachusetts Senator for speaking candidly about the consistent racial bias of the pending nominee for Attorney General (Jeff Sessions). While defending his appalling decision to force Senator Warren to stop talking and then following it up with a formal rebuke, he said that she was warned and then added — "Nevertheless, she persisted." And thus was launched a new rallying call for concerned citizens everywhere.
A Banking Scorecard
Which Team Is Winning?
I still remember going to my first professional baseball game (Crosley Field in Cincinnati when the Reds were called the Redlegs) and hearing "You can't tell the players without a scorecard" from the roving band of vendors selling programs outside the stadium. While I have learned much since those days, the value of a program and a scorecard is firmly embedded in my mind.
Especially when it comes to lenders, I want a scorecard that will help all of us know what the score is and who is on our team and the opposing team. Does my bank have a strong bench and a winning team? Are they going to trade for better players? I know what happened when the Redlegs lost, but what happens when banks lose? In baseball, there is the traditional "Just wait until next year." Are we still waiting for next year with banks? Is my bank winning or losing?
Please read on for my best effort at producing a banking scorecard and program.
What We All Need to Know
This book will be an eye-opener for most readers. Banking is pervasive in our business world and economy, and this covers more essential things that we all need to know about banks.
The Third President of the United States Was Worried About Banks
The famous quote from Thomas Jefferson is generally abbreviated as shown both above and below, but here is the full context of his original statement:
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
While this reflects a viewpoint that is two centuries old, today there is still an ample supply of concern and questions directed at the current financial establishment.
When should we stop worrying about banks?
Banking establishments are more dangerous than standing armies.— Thomas Jefferson
To illustrate perhaps how little things have changed since Thomas Jefferson aired his candid thoughts, here are the titles of a few reports and articles published since the beginning of the most recent banking crisis.
- "There Are Still 'Zombie Banks' Around"
- "Derivatives: Bailed-Out Banks Still Making Billions off Risky Bets"
- "Problem Bank List at 20 Year High as Regulators Let Zombie Banks Remain Open"
Most readers of this candid book (myself included) think that the title says it all.
What are Zombie Banks?
As suggested by the article titles above, the concept of "Zombie Banks" appears to be prominently mentioned when reviewing both current and recent serious evaluations of the financial industry. The term has been used for at least 25 years (perhaps longer) to describe institutions that are still operating even though they have a negative net worth. This is usually made possible by external government guarantees or other support.
While there appears to be significant entertainment value associated with the concept of "Zombies," there is still the practical reality of working with a Zombie Bank in circumstances that are far from entertaining.
Looking for Answers About Lenders?
Does the FDIC keep a banking scorecard?
The FDIC (Federal Deposit Insurance Corporation) is the federal government agency that is responsible for monitoring bank deposits and the financial health of banking institutions in the United States. When I first heard about the FDIC list of Problem Banks, I thought that I had finally discovered a true banking scorecard. The FDIC does keep track of troubled institutions and releases quarterly data about the number of lenders on their list. But the quarterly report does not provide the names of those in distress, only how many. So as scorecards and programs go, this is like buying a baseball program that only tells you how many players are on the field without identifying them at all. In terms of how many Problem Banks are currently on the field, the recent numbers have ranged from 200 to 850 during the past several years. This should be compared to less than 50 troubled before the current financial crisis.
How many banks are in financial trouble?
There are currently what I broadly refer to as good banks, bad banks and maybe banks. Which category I assign them to depends on much more than the criteria used by the FDIC to create their anonymous list of Problem Banks. But based just on their data, about 10 percent of all lenders have been viewed as being in a troubled operating condition for several years. When larger institutions were subjected to a financial stress test four years after the bank bailout, about 20 percent failed the test. My personal classification of these companies is strongly tied to their actual lending practices for both individuals and businesses. While many bankers claim to be lending normally again, in practice the industry has changed what they are doing and how they do it. For example, below I have listed several small business financing programs that have become more rare. On the other side of the coin, a growing number of lenders have actually become more active in controversial lending programs like payday loans that involve annualized rates of interest as high as 300 percent in many cases. It is a judgment call whether banks engaging in such practices are in financial trouble or simply trying to make more money by taking advantage of consumers. Part of my small business consulting role is to maintain updated lists of lenders to work with or avoid. This has been a never-ending challenge for me during the past 25 years. But it is probably as close as I can hope to get in my personal quest for a practical banking scorecard.
Small Business Finance Services in Particularly Short Supply
Here are several "normal" small business financing services that are simply not being provided by a very large number of lenders. As noted above, the availability or lack of these commercial financing programs serves as a major indicator of whether an institution should be viewed as a "bad bank" or "good bank."
- Working capital financing
- Low-cost credit card processing for merchants
- Construction financing
- Refinancing commercial real estate loans
Wouldn't you like to know why Shelia Bair (previous head of the FDIC) said the following?
"The banks should have been let go."
Strength in Numbers?
In recent years we have periodically heard the phrase "Too Big to Fail" in reference to our lending institutions. The practical rationale has been successfully used by lobbyists as a scare tactic to prevent larger institutional failures from rattling consumer confidence. A relatively small number of banks now have well over half of total deposits. This excessive proportion has actually gotten worse as a result of the financial crisis because the "Too Big to Fail" fish were allowed to swallow up even more of the little fish.
"Too Many to Fail" originated during the savings and loan crisis in the 1980s when several hundred failing S&Ls were saved by government bailouts. But the recent FDIC list of troubled financial institutions has fluctuated between 200 and over 800 for several years, so the phrase seems equally relevant today.
Any individual or company working with banks should continue to be skeptical about the true financial condition. Pay particular attention to experts like Sheila Bair and Elizabeth Warren. Everything in this financial industry has changed during the past 15 years, and it is unlikely to ever be the same again.
A banker lends you his umbrella when the sun is shining but wants it back when it begins to rain.— Mark Twain
Similar to Thomas Jefferson's observation, the critique from Mark Twain also seems to still have its own fair share of relevance to today's economic environment.
A Poll - Please Give Us Your Opinion - Agree or Disagree with Thomas Jefferson and Mark Twain?
While recognizing that the Thomas Jefferson and Mark Twain comments were made many years ago, the poll below asks if you generally disagree or agree with the underlying premise of the quotes. In other words, do you think these statements are still relevant to today's financial environment?
Do you agree or disagree with the Mark Twain and Thomas Jefferson quotes shown above?
Zombie Bank Problems - A Musical View
The banks should have been let go.— Sheila Bair
Many agree that the banking industry is not sustainable in its current form. Here is a book that provides necessary details.
One More Thing - When Should We Really Start To Worry? (Or Stop Worrying?)
By the way, I started worrying about 10 years ago (and haven't stopped yet).
When the first symptoms of a banking crisis appeared (2003 to 2005, several years before the bailout), one number that a lot of us were looking at involved the percentage of mortgage loans that were delinquent. Every time that an analyst or other independent observer noted a brewing problem when this number kept growing, the bankers kept pushing back that everything was fine and that such fluctuations were normal. The "acceptable" delinquency rate is probably in the 1-2 percent range (or less). A totally different number that I have been watching closely during the last five years is the percentage of all lending institutions carried by the FDIC (Federal Deposit Insurance Corporation) on their Problem Bank List. Before the recent crisis, this list included about 50 lenders. From 2009 through most of 2013, this number fluctuated between 400 and 850, or 17 times as many. This represents close to 11 percent of all banks and I don't care how positively lobbyists try to spin this number, I won't stop worrying until the number is back to under 50.
The best way to rob a bank is to own one.— William K. Black
We Don't Need More Job Creators Like This!
Some political factions are fond of using the term "Job Creators" to defend a wide variety of legislation and actions ranging from tax reductions to deregulation. This partisan tendency is often applied to banks and the financial industry. For example, "We need to get out of the way of job-creating businesses like banking institutions by making it easier for them to operate by eliminating regulations and reducing taxes."
In spite of propaganda like this, many big banks continue to destroy jobs more than create them in recent years. The biggest banks roll out new job-cutting initiatives on a regular basis. For example, in a February 2017 announcement, the Bank of America told of their plans to open a large number of banking locations with no employees whatsoever! This obviously takes "impersonal service" to a historically new level.
© 2012 Stephen Bush